Economics and the Economy

Chapter 1 Economics and the Economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 1.1 What is Economics?  ECONOMICS ...  is the study of how society decides: – What – For whom – How to produce... 1.2 The price of oil 0 5 10 15 20 25 30 35 40 19 65 19 75 19 85 19 95 US $ pe r b ar re l Tripled in 1973-74, and doubled again in 1979-80 … and affected people all over the world. 1.3 An increase in the price of oil affects  What to produce – less oil-intensive products  How to produce – less oil-intensive techniques  For whom to produce – oil producers have more buying power, importers have less 1.4 The distribution of world population and GNP, 1998 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Population GNP LIC MIC HIC 1.5 Scarcity forces choices to be made  Opportunity cost  a crucial concept in economic analysis  the quantity of other goods that must be sacrificed to obtain another unit of a good 1.6 The production possibility frontier For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced. Film output F o o d o u tp u t Production possibility frontier 1.7 The operation of markets  Market – a shorthand expression for the process by which – households’ decisions about consumption of alternative goods – firms’ decisions about what and how to produce – and workers’ decisions about how much and for whom to work  are all reconciled by adjustment of prices 1.8 Resource allocation  Resource allocation is crucial for a society  and is handled in different ways in different societies, e.g.: – Command economy –Mixed economy – Free market 1.9 Market orientation Cuba China Hungary Sweden UK USA Hong Kong Command economy Free market economy 1.10 Normative and Positive Economics  Positive economics deals with objective explanation – e.g. if a tax is imposed on a good its price will tend to rise  Normative economics offers prescriptions based on value judgements – e.g. a tax SHOULD be imposed on tobacco to discourage smoking 1.11 Micro and Macro  Microeconomics – offers a detailed treatment of individual economic decisions about particular commodities  Macroeconomics – emphasizes the interactions in the economy as a whole