1. Introduction to Economics and economics system.pptx

Economics

1. MAE 405 Introduction to Economics Ms. W.P.W Anjalika Faculty of Engineering and Management Ocean University of Sri Lanka

2. Aim of the Cause Unit: This course unit aims to equip students with basic principles, concepts and theories of microeconomics and develop them to apply knowledge in the decision making process studying various economic issues in social and business environment. 2

3. 1. Scope Basic economic issues Economic problems Types of economic systems Economics as social science 2 Elementary theory of demand and sup ply Nature and determinant of quantity of demand Demand and price Nature and determinant of quantity of supply Supply and price Concept of market Law of demand and supply Prices in inflation Theory of market price and market behavior Price fluctuation and dynamic theory of price Elasticity of demand and supply 3

4. 3. Issues of economic growth in developing countries Restraints on economic development (inadequate or inefficient use of natural resources, inefficient agriculture, rapid population growth, cultural barriers, inadequate financial institutions, inadequate infrastructure) Strategies for industrial development; import substitution and export promotion; industrial planning; execution of development plans Balance of payment 4

5. Intended Learning Outcomes (ILOs) On completion of this course unit, students will be able to: Introduce microeconomics and its importance Explain the core concepts of microeconomics Explain the theory of demand, supply and price determination Explain different market structures Understand the applicability of microeconomic theories in the socio-economic environment 5

6. Evaluation Your performance will be assessed using; Continuous Assessments (CAs) - 40 marks out of 100 End Semester Examination - 60 marks out of 100 Continuous Assessments (CAs): 40 marks out of 100 have been allocated for CAs. Students require to face quizzes which will be given without prior notice during the lecture time. In addition, assignments are given to test the students’ ability of the applicability of microeconomic theories in the socio-economic environment.   End Semester Examination : 60 marks out of 100 have been allocated for the end semester examination. 6

7. What is economics? Economics as a social science It study the behaviour of the individuals and different units of the society living in the world. Economics as a science Economics is a science of scarcity . Scarcity means that we have limited resources to satisfy unlimited wants. Since we are unable to have everything we desire, we must make choices on how we will use our resources. Hence economics is study of choices 7

8. What is economics? The word ‘Economics’ was derived from two Greek words, Oikos (a house) and Nemein (to manage) This mean ‘managing an household’ using the limited funds available, in the most satisfactory manner. Thus, Economics shows, ‘’ how scarce resources can be used to increase human wants.’’ 8

9. Two major factors are responsible for the emergence of economics problem. The existence of unlimited human wants. The scarcity of available resources. The numerous human wants are to be satisfied through the scarce resources available in nature. Economics deals with how the numerous human wants are to be satisfied with limited resources . 9

10. What is Industrial Economics? Industrial Economics is the study of firms, industries markets and their relationship with society When analyzing decision making at the levels of the individual firm and industry, Industrial Economics helps us understand such issues as: the levels at which capacity, output and prices are set; the extent that products are differentiated from each other; how much firms invest in research and development (R&D) how and why firms advertise 10

11. Economics is a Social Science Science can be grouped into two broad categories: Pure Science and Social Science. Pure Science is the study of the behaviour of naturally occurring objects or phenomena such as light, objects, matter, earth, the human body. ( exploratory and explanatory ) Social Science is the study of the behaviour of people such as individuals, group of people, firms, societies, or economies, and their individual or collective behaviours. 11

12. Why we study economics? Individuals face numerous problems in day to day life such as; How individuals/business firms behave to maximize their wants by minimizing costs. How can we spend money to achieve the greatest satisfaction or happiness? How can a business firm decide maximum output at the lowest costs? How does a firm determine what quantity to produce and what price to charge for its product to maximize its profit? The government face many challenges how to increase income of the nations, how to minimize poverty, how to reduce inflation, how to increase investment, how to spend money on welfare etc. 12

13. Micro and Macroeconomics Two main branches are identified in economics; microeconomics and macroeconomics . Microeconomics relates to the study of behaviour of individual economic units such as individual consumer, business firm, commodity etc. Macroeconomics is dealing with aggregates. Aggregates represent the society as whole. For instance, per capita income, employment, unemployment, general price level, balance of payment, literacy rate, HDI, Poverty etc. are considered as the macroeconomic variables. Thus, microeconomics gives us a microscope view of the economy while macroeconomics gives us a bird’s eye view of the economy . 13

14. Fundamental economics concepts Needs Needs: The necessities of life Or minimum things you need to live as an individual in the society Two types of needs we want as, 1.Physical needs 2. Mental needs Main characteristics of needs is limited Ex: Food / Clothing / Shelter / Warmth / Medical Care Wants Wants : Those things that make life enjoyable and pleasurable Ex: Designer cloths / Cars/coca cola / sarees 14

15. Characteristics of wants 1. Unlimited 2.Grow frequently 3.Complex 4.Different 15

16. Basic human needs A need is something necessary for a person in order to survive and grow. Physical needs include: Food and water Protection Shelter Activity Sleep and rest Safety Comfort, especially freedom from pain Success self-esteem Psychological needs include: Love and affection 16

17. Achieving the human needs Human needs can be achieved only by the consumption of the goods and services. This goods are, Free goods Economics goods Free goods / Products: Free Products are so plentiful no price can be attached sunshine or air. 17

18. Economic goods/ Products Economic Products are goods and services that are useful, relatively scarce, and transferable to others. Basic characteristics of this type of good is scarcity 18

19. Goods / Commodity Consumer Goods – to be used by individuals. Capital Goods – a good used to produce another good. OR Durable Goods - last three years or more. Nondurable Goods – last less than three years. 19 Good or service that can be satisfied human wants.

20. Services 20 work performed for someone. This includes work that doctors, lawyers, and teachers perform. The difference between a good and service is that a service cannot be touched or felt.

21. Choice Decision made among alternatives or possibilities. We make choice every day. Why do we have to make choices about which goods or services we can buy? The resources used to make goods and services are scare and scare resources have alternative uses. 21

22. Why do we have to make choice? - Scarcity The fact that there is a limited amount of resources to satisfy unlimited wants. This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs and as many additional wants as possible. Any resource that has a non-zero cost to consume is scarce to some degree, but what matters in practice is relative scarcity. Even free natural resources can become scarce if costs arise in obtaining or consuming them, or if consumer demand for previously unwanted resources increases due to changing preferences or newly discovered uses. 22

23. There might be a scarcity of, Time Money Space Goods and service 23

24. Opportunity cost NEXT BEST choice given up when a decision is made EX; 24

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27. If I choose the main highways -my opportunity cost is missing the beautiful scenery of big surrounding. 27

28. 28 2. Sleeping is the opportunity cost of studying for test Example 2: If Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.

29. What are resources/ Factors of Production? Definition : The things used to make other goods 29

30. Land Labor Capital Entrepreneurship Natural resources that are used in the production of goods and services. Some examples of  land  are lumber, raw materials, fish, soil, minerals, and energy resources. Work effort used in the production of goods and services. Some examples are the number of workers and number of hours worked. Physical goods that are produced and used to produce other goods. Examples of  capital  would be machinery, technology, and tools such as computers; hammers; factories; robots; trucks, and trains used to transport goods; and other equipment employed in the production of a good or service. Organize factor of production and take a risk. 30

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32. Economic Actors 1. House hold/consumers: Organize to consume Maximize the economic welfare of satisfaction is main objective. 2. Firms /Producers: Organize to production Maximize the profit is main intention. 3. Workers / Labours 4. Market: Through which buyers and sellers carry out exchange (Product market/factor market) 5. Government Maximize the welfare of the citizen 32

33. Basic Economic Problems 33

34. What to Produce: Let us consider the first question: ‘which commodities are to be produced and in what quantities? 34

35. (ii) How to Produce: In context of this it is: ‘which techniques are to be adopted’? Technology means the correct proportion in which the different factors of production are to be employed. There are two types of techniques. A labour-intensive technique would employ relatively more labour and less capital. On the other hand, capital- intensive technique means more capital and less labour . 35

36. (iii) For Whom to Produce: This question relates to the final market of the goods and services we are going to produce. Whom are we going to sell these goods and services? Should we produce for rich people or the middle class? Should we produce for youth or the elderly? The solution of this problem is very simple commodity can be consumed only by people who have more purchasing power. 36

37. Production Possibility Curve (PPC)

38. What is PPC/PPF?  The production possibility curve represents, maximum possible output combinations of two goods using all the available resources. Since we are using all available resources, increasing the production of one of the goods means decreasing the production of other goods PPC curve designed to describe ‘’Choice and effect of choice of the economy’’

39. Assumptions in PPC PPC can draw based on following Assumptions, Only two products can be produced in the economy The resources available are fixed Quantity and qualities of all resource inputs remain unchanged during period of time. 2. All resources are fully employed Economy operates with all its factors of production fully employed and producing the greatest output possible without waste or mismanagement. 3. 4. The technology remains unchanged

40. How derive Production Possibility Curve? (PPC) Assume that the economy produces only two goods (say Paddy and Garment) using its resources fully and production possibilities are given below. If the economy uses all the resources to produce garment production, it cannot produce paddy. If we assume that the economy uses all the resources to produce paddy, no garment production can be made. The economy decides to produce both, it can have different combinations. Draw the curve

41. 41 Reasons of having different shapes of PPC The shape of the production possibility curve (PPC) differ when change the opportunity cost. When, Opportunity Cost is constant PPC shapes linear Opportunity Cost is increasing PPC shapes Concave to the origin Opportunity Cost is decreasing PPC shapes Convex to the origin

42. Constant Opportunity Cost increase production of one good, the opportunity cost to produce an additional good will remain constant ., or, when the  opportunity cost  of a good remains  constant  as output of the good increases Constant Opportunity Cost shows Linear PPC = Opportunity Cost of Paddy Draw the curve When increasing the paddy production, sacrificing value of garment is constant.  

43. Increasing Opportunity Cost The  increasing opportunity costs  states that as you increase production of one good, the opportunity cost to produce an additional good will increase. The shape of Increasing Opportunity Cost curve is Concave to origin. Draw curve = Opportunity Cost of Paddy When increasing the paddy production, sacrificing value of garment decreases at increasing rate showing Increasing Opportunity Cost.  

44. Decreasing Opportunity Cost The  decreasing opportunity costs  states that as you increase production of one good, the opportunity cost to produce an additional good will decrease. Shape of Decreasing Opportunity Cost is Convex to origin Draw curve When increasing the paddy production, sacrificing value of garment decreases at decreasing rate showing Decreasing Opportunity Cost.

45. Increasing Opportunity costs when the opportunity cost of a good increases as output of the good increases. constant opportunity costs when the opportunity cost of a good remains constant as output of the good increases. Decreasing Opportunity costs when the opportunity cost of a good decreases as output of the good increases. 45 Summery

46. Practical usage of PPC Shift PPC totally into the right side Shift PPC totally into the left side Shift PPC right side only one axis 46

47. Factors cause to shift in PPC Change in quantity or quality of factors of production (Resources) Change in technology 47

48. PPC shift outward when (shift right side) , Increasing the Economic Growth Increasing productivity of labour New labours coming in to the labour market Increasing the international trade Finding new technology Use new land for cultivation Construct new rail ways, road ways high ways, Building 48

49. Shift PPC totally into the left side 49  1. destruction of resources in an earthquake 2. Black death pandemic spread in the Europe between 1347 and 1351 3. Yugoslavia war destroyed all roads, water supply, bridges etc. 4. Economic recession

50. Shift PPC only one axis 50 Reason to having a point on the PPC curve

51. Points left side in the PPC and right side in the PPC 51

52. Can you answer the following questions? What do you mean by Economics? (5 marks) 2. ‘Economics is considered as a Science’ Do you agree? Explain. (5 marks) 3. Briefly discuss why do you study economics? (6 marks) 4. Distinguish between micro and macroeconomics. (6 marks) 5.What do you mean by Opportunity cost? Explain this using examples. (5 marks) 6.Explain following as factors of production. Labour Capital ( 8 marks) 52

53. 7 . What is Production Possibility Curve? Explain it using real world example. (5 marks) 53