Introduction

Economics Lecture 1: Introduction Hanifa Tyrkba Phd, Associate professor Department of Political Economy, Faculty of Economics What does Economics study? 1 the study of how individuals and societies make decisions about ways to use LIMITED resources to fulfill UNLIMITED wants and needs 2 limited resources in relation to growing needs 3 Problem of choice – how to rationally use limited resources? Microeconomics • Decisions of individual units • No matter how large • Example: GE’s pricing policy How do individuals make economic decisions Macroeconomics • • • • Behavior of entire economies No matter how small Example: inflation in Monaco Economic aggregates: aggregate output, inflation, unemployment, GDP The big picture: growth, employment, etc. Is it a good time to switch jobs? Should you ask for a raise? HOW MACROECONOMICS INFLUENCES OUR DECISIONS? Should I buy that new house now or wait? Should I get a variable or fixed rate mortgage? Fundamental Problem Scarcity • unlimited wants and needs but limited resources Unlimited wants VS Limited Resources • You can’t buy 10 candy bars if the store only has 5 candy bars to sell. • Can’t buy 3 burgers if you only have enough money for TRADE-OFFS You can’t have it all (SCARCITY – remember) so you have to choose how to spend your money, time, and energy. These decisions involve picking one thing over all the other possibilities – a TRADE-OFF At this moment have you thought that you could be doing something else instead of attending Economics class? The result of your Trade-Off is the OPPORTUNITY COST = The Value of the Next Best Choice (Ex: Sleeping is the opportunity cost of studying for a test) University Vs. Work • What are you planning on doing after you finish high school? • • University or work What factors did you consider when making this decision? • money now or money later • Family • How will this decision impact your future? • What are the trade offs of this decision? Opportunity cost? Factors of production = resources LABOR LAND CAPITAL ENTREPRENEURSHI P Production Process Land Goods Labor Production Consumers Capital Services Entrepreneurship Предпринимательство Labor Wage Profit Factors of Production and their payments Capital Land Interest Rent Production possibility curve Scarcity of resources determines their alternative use y x Alternative production of products x and y Combinations X Y Opportunity costs A 15 - B 1 14 15-14=1 C 2 12 14-12=2 D 3 9 12-9=3 E 4 5 4 F 5 5 Household Consumes final goods and services Firms main purpose: maximize profit Government Regulates the economy (or not) Economic agent = Takes part in economic activities Economic circular flow Income of households Expenditures of households Households Market of goods and services Firms’ income Money flows in one direction Resources Market of resources Goods and services Firms Firms’ expenditures Goods, services and resources flow in another direction Economic circular flow Subsidies Firm Resources Taxes Government Taxes Payment for resources Household Economic Questions Society (we) must figure out WHAT to produce (make) HOW to Produce it (manufacture) FOR WHOM to Produce (who gets what) WHO gets to make these decisions? What is economic system? means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country. Types of economic systems: • traditional; • market; • command (planned) • mixed Traditional economic system  The most ancient type of economic system  Based on primitive economy Market economic system  Private ownership of property/resources  Business decisions are driven by the desire to earn a profit  There is a great deal of competition.  Consumers have many choices  no government intervention Planned economic system  Opposite to market economic system;  Mainly Public property  centralized authority controls a significant portion of the economic structure Mixed economic system  Private sector and public sector combine the (characteristics of the market and command economic systems)  Overcomes the disadvantages of market economic system  Most industries are private, while the rest, composed primarily of public services, are under the control of the government Traditional system 1 Based on customs and traditions, produce what They need 2 Market system Firm produces what are consumers willing to buy (Demand) What to produce? 3 4 Planned system However the government decide Mixed system Private and public sectors 1 Traditional system Customs and traditions (farming, hunting, gathering), manual labor 2 Market system Firms choose the means of production (Most efficient and profitable Methods) How to produce? 3 4 Planned system The government does the planning for production, factory locations, the occupations of workers and their salaries Mixed system Частный сектор- производители, государство 1 Traditional system Customs and traditions 2 Market system Consumers’ income determines who receives which goods/services For whom to produce? 3 4 Planned system The government controls the distribution Mixed system Consumers’ income determines who receives which goods/services Traditional economic system Advantages • Stable and predictable • Doesn’t depend on external factors Disadvantages • Slow economic growth rate • Low standards of life • Technology, property rights, and capital investment are largely absent Market economic system Advantages • Individual freedom for everyone • Little government interference • Decentralized – not concentrated in the hands of a few • Variety of goods and services • High degree of consumer satisfaction Disadvantages • the lack of social security, social inequality, • chaotic distribution of resources, • economic crisis Planned economic system Advantages • Capable of dramatic change in a short time • Little uncertainty over choice of career, where to work, or losing job • Many basic education, public health, and other public services available at little or no cost Disadvantages • Does not meet wants and needs of consumers • Lacks effective incentives to get people to work • Requires large bureaucracy, which consumes resources • New and different ideas discouraged, no room for individuality Mixed economic system Advantages  Combines advantages of Market and planned economic systems Disadvantages  Inflation and unemployment;  High differentiation between poor and rich HOW WOULD YOUR RESTAURANT FUNCTION IN DIFFERENT ECONOMIC SYSTEMS? Your restaurant in market system You answer the basic economic questions! You determine how much cheese and pepperoni goes on the pizza You determine the quality of the cheese and pepperoni You set your employees wages You set your business hours Your restaurant in planned system The government answers the basic economic questions The government sets the amount of cheese and pepperoni on each pizza The government determines quality of cheese and pepperoni The government sets employees wages The government sets business hours Problem: What does the government know about pizza? Your restaurant in mixed system The Government and you both answer the basic economic questions You determine the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza You set employee wages; government sets minimum wage for employees You determine business hours; government determines whether I am safe to be open or not Government in economy balance between market mechanism and government regulation, between private and public sectors determine the most effective forms of government intervention in the economy Index of economic freedom, 2019 Hong Kong 90.2 Singapore 89.4 New Zealand Switzerland Australia Ireland 84.4 81.9 80.9 80.5 low level of government intervention and its sizes Low tax burden / focus on ease of doing business