1. 1 NATURE OF ECONOMICS C H A P T E R Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

2. After studying this chapter, you should be able:
CHAPTER OBJECTIVES
After studying this chapter, you should be able:
To give the definition of economics
To know economics perspective and its goals
To identify the three major questions for proper use
To understand macro- and micro-economic
To explain the economic system
To define the Circular Flow of economic Activity
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

3. Nature and importance of Economics
The word economy comes from the Greek word for “one who manages a household”
The management of society’s resources is important because resources are scarce.
Understanding economics helps us make sense of the world we live in.
Economics studies how people make decisions.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

4. Definition
The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants.
Human wants are unlimited, but the means to satisfy the wants are limited.
Economics is the study of how society manages its scarce resources.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

5. Economists view things through a unique perspective.
The Economics Perspective
Economists view things through a unique perspective.
Scarcity and choice.
Resources can only be used for one purpose at a time.
Scarcity requires that choices be made.
The cost of any good, service, or activity is the value of what must be given up to obtain it.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

6. The Economics Perspective
Rational Behavior.
Rational self-interest entails making decisions to achieve maximum utility.
Different preferences and circumstances lead to different choices.
Marginalism: benefits and costs
Most decisions concern a change in current conditions
Weighs the marginal benefit against the marginal cost
The marginal cost of an action should not exceed its marginal benefits
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

7. Economic Goals
Economic policies are designed to achieve certain economic goals.
Economic growth
Full employment
Economic Efficiency
Price-level Stability
Economic freedom
Equitable Distribution of Income
Economic Security
Balance of Trade
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

8. Fundamental of Economic Problem
Societies do not have enough productive resources to satisfy everyone’s wants and needs.
If each of us were to make a list of all the things we want, it would most likely include more things than we could ever hope to obtain.
Scarcity : the fundamental economic problem facing all societies.
Needs and Wants: needs for survival, but wants is more much broader than the term of needs.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

9. Three Basic questions Scarcity Choices Ch1: Nature of Economics
Unlimited wants
Limited resources
Ch1: Nature of Economics
Scarcity
Choices
What to produce
How to produce
For Whom to produce
Lectured By: Mr. Phorn Much, MBA

10. Macroeconomics and Microeconomics
Macroeconomics examines the economy as a whole
It includes measures of total output, total employment, total income, aggregate expenditures, and the general price level.
It is a general overview examining the forest, not the trees
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

11. Macroeconomics and Microeconomics
Microeconomics looks at specific economic units.
It is concerned with the individual industry, firm or household and the price of specific products and resources.
It is an examination of trees, and not the forest.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

12. Positive versus Normative Analysis
Positive economics describes the economy as it actually is, avoiding value judgments and trying to establish scientific statements about economic behavior (Absolute Facts)
Normative economics involves value
judgments about what the economy should
be like and the desirability of the policy
options available (What Ought to be)
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

13. The factors of Production
The four factors of production must be presented to produce goods and services.
land: includes gifts of nature, or natural resources not man- made.
Capital: includes the tools, equipment, and factories used in production
Labor: includes people with all their efforts and abilities.
Entrepreneurs: individuals who starts a new Business or bring a product market.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

14. Economic System
When companies want to do business in other countries, they need to adjust their business plans to meet local customs.
Economic System_ an organized way of providing for the wants and needs of their people
There are three major kinds of economics systems
Traditional
Command
Market economies
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

15. Economic System Traditional Economies
Many of our actions spring from habit and custom.
Characteristics:
ritual, habit, or custom
Advantages:
everyone knows which role to play. Only little uncertainty exists over “What to produce, How to produce, For Whom to produce”
Disadvantages:
tends to discourage new ideas and new ways of doing things,
The lack of progress leads to economic stagnation (stop working) and low standard of living than in other economic systems.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

16. Economic System Command Economies
A central authority makes the major decisions about “What, How, for Whom to produce”
Characteristics:
The government makes the major economic decisions.
Advantages:
It can change direction drastically
Many health and public services are available to everyone at little or no cost (represented by the former Soviet Union)
Disadvantages:
One is that they ignore the basic wants and needs of consumers.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

17. Economic System Command Economies
A central authority makes the major decisions about “What, How, for Whom to produce”
Disadvantages:
The system gives people the incentive to fill quotas instead of producing a good product
A command economy requires a large decision making bureaucracy.
The planning bureaucracy lacks the flexibility to deal with minor day-to-day problems.
Rewards for individual initiative are rare.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

18. Economic System Market Economies
People make decisions in their own best interest,
Characteristics:
Characterized by a great deal of freedom
Feature the private ownership of resources, based on Capitalism.
Advantages:
High degree of individual freedom.
Adjusts gradually to change over time.
The relatively small degree of government interference
Decision making is decentralized
The variety of goods and services
High degree of consumer satisfaction
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

19. Economic System Market Economies
People make decisions in their own best interest,
Disadvantages:
Does not provide for everyone, some people may be too young, too old, or sick to earn a living or to care for themselves.
May not provide enough of some basic goods and services.
High degree of uncertainty
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

20. Economic System Mixed Economies
Systems that combine elements of all three types, traditional, command, and Market economies.
Characteristics:
Tradition as well as market, answer some of the questions of “What, How, for Whom to produce”
Some governments intervene only in certain key sectors or industries and leave the rest to markets
Advantages:
Provides assistance for some people who might otherwise be left out.
Still share certain benefits to people who are not fortunate.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

21. Economic System Mixed Economies
Systems that combine elements of all three types, traditional, command, and Market economies.
Disadvantages:
Tend to provide more services, the costs for these benefits can mean higher costs for overall citizens.
the availability of services may be limited or the quality may deteriorate (miserable) over time.
Because socialism has proved to be inefficient, many socialistic countries today allow more capitalist development.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

22. Circular Flow of Economic Activity
The economic activity in markets connects individuals and businesses.
The wealth that an economy generates is made possible by circular flow of economic activity.
Factor Markets
Individuals earn their incomes in factor markets, where the factor of production are bought and sold.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

23. Circular Flow of Economic Activity
Product Markets
After individuals receive their income from the resources they sell in a factor market, they spend it in Product Markets.
These are the markets where producers sell their goods and services.
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA

24. Circular Flow of Economic Activity
Ch1: Nature of Economics
Lectured By: Mr. Phorn Much, MBA