Lecture 1 Required Reading: Sloman & Garratt (2012) Chapter 1 Introduction to Economics

Economic problems – production and consumption Scarcity: the central economic problem – defining scarcity – use of resources (factors of production) – demand and supply Macroeconomic issues – Growth, unemployment, inflation, finance etc. Studying Economics

Microeconomic issues – choices: what, how and for whom – the concept of opportunity cost – rational economic decision making marginal costs and marginal benefits MB > MC  do more, MC > MB  do less Consider a Production Possibility Frontier (PPF) – Shows all feasible combinations of two outputs given available inputs. Studying Economics

Feasible Output Let’s suppose that a country can use it’s resources to manufacture two goods: food and clothing. Division of resources between the manufacture of these goods means that the following combinations would be feasible: Food Clothing PPF A B C D E PointClothingFood A0600 B40500 C60400 D80200 E900

The Frontier The frontier demonstrates the limits of output given the country’s resources are fully and efficiently employed. Anything on or within the shaded area is feasible – anything outside it is not. Food Clothing PPF A B C D E F Points A-E are feasible and efficient, Point F is feasible but inefficient and Point G is not (yet) feasible given the current state of technology, education, training etc. G

Opportunity Cost The PPF also demonstrates increasing opportunity cost. Opportunity cost is the cost of an action measured in terms of the next best alternative foregone. Here the opportunity cost of producing clothing is measured in units of food (and vice versa). Food Clothing PPF A B C D E Notice how the opportunity cost of clothing increases as we make more of it. From Point A, 40 units of clothing can be made at a cost of 100 units of food. The next 40 units of clothing ‘cost’ 300 units of food (and so on).

Totally planned economy Totally free-market economy Output Decisions There are different mechanisms by which decisions relating to quantities of goods that are produced. Broadly speaking, the two extremes are planned (command) economies and free-market economies. N. Korea Cuba Poland FranceUSA N. Korea China Poland France UK USA Mid 1980s Late 2000s China Hong Kong Cuba China (Hong Kong) UK

Advantages of a planned economy – high investment, high growth – stable growth – social goals pursued – low unemployment Problems of a planned economy – problems of gathering information – expensive to administer – inappropriate incentives – shortages and surpluses Planned Economies

Advantages of a free-market economy – transmits information between buyers and sellers – no need for costly bureaucracy – incentives to be efficient – competitive markets respond to consumers Problems of a free-market economy – competition may be limited: the problem of market power – inequality – the environment and other social goals may be ignored Free-Market Economies