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Economics for Business - Lecture 1: Introduction to Economics

Economists Study

  • Economic problems:

    • Production and consumption.

    • Scarcity

    Use of resources (factors of production):

    • Labour

    • Land and raw materials

    • Capital

  • Demand and Supply:

    • Importance of reconciling demand and supply.

    • Actual and potential demand and supply.

Macroeconomic Issues

  • Growth.

  • Recessions.

  • Unemployment.

  • Inflation.

  • Balance of trade.

  • Cyclical fluctuations.

Macroeconomic Policy

  • Demand-side policy.

  • Supply-side policy.

Microeconomic Issues

  • Choices:

    • What?

    • How?

    • For whom?

  • The concept of opportunity cost.

  • Rational economic decision making

    • Marginal costs and marginal benefits.

    • MC > MB → do more.

    • MC<MB → do less.

Marginal costs (MC) are the additional cost incurred from producing one more unit of a good or service, while marginal benefits (MB) are the additional satisfaction or utility gained from that additional unit.

The principle is that you should continue to do more of something as long as the marginal benefits exceed the marginal costs (MC>MB). Conversely, you should do less if the marginal costs exceed the marginal benefits (MC<MB).

For example, consider studying for an exam. The marginal cost might be the hour of sleep you lose, or the time you could have spent doing something else. The marginal benefit is the potential increase in your grade. If you believe that the improvement in your grade from studying one more hour is worth more than the hour of sleep lost, you should continue to study. On the other hand, if the expected improvement in your grade does not justify the sacrifice of your sleep, it would be wiser to prioritize rest and focus on more efficient studying strategies.

  • Microeconomic objectives:

    • Efficiency.

    • Equity.

    • The social implications of choice.

The Production Possibility Curve

  • Shows the maximum possible production combinations of two goods or services given the available resources and technology.

  • Illustrates concepts such as scarcity, choice, and opportunity cost.

  • Microeconomics and the production possibility curve:

    • Choices and opportunity cost.

    • Increasing opportunity cost.

  • Macroeconomics and the production possibility curve:

    • Production within the curve, indicating inefficient use of resources.

    • Shifts in the curve represent economic growth or changes in production capacity.

The Circular Flow of Income

  • Firms and households interact in two main markets:

    • Goods markets (product markets).

    • Factor markets (resource markets).

  • Real Flows:

    • Goods and services flow from firms to households.

    • Services of labor and other factors flow from households to firms.

  • Money Flows:

    • Consumer expenditure flows from households to firms.

    • Wages, rent, dividends, etc., flow from firms to households.

  • Macroeconomic issues:

    • The size of total flows indicates the overall level of economic activity.

  • Microeconomic issues:

    • Individual markets and choices within goods and factor markets.

Economic Systems

  • Methods of classification:

    • By degree of government control.

The Command Economy

  • Features of a command economy:

    • Centralized planning of production and consumption.

    • Government control of resources.

  • Planning:

    • Consumption and investment.

    • Matching of inputs and outputs.

    • Distribution of output.

Advantages of a Command Economy

  • High investment, high growth.

  • Stable growth.

  • Social goals pursued.

  • Low unemployment.

Problems of a Command Economy

  • Problems of gathering information.

  • Expensive to administer.

  • Inappropriate incentives.

  • Shortages and surpluses.

The Free-Market Economy

  • Demand and supply decisions are decentralized.

  • The price mechanism:

    • Shortages and surpluses are resolved through price adjustments.

    • Equilibrium price balances supply and demand.

    • The market responds to changes in demand and supply.

  • Adam Smith and the Invisible Hand:

    • Competition leads individuals in the pursuit of their private interests (profits) to pursue the public interest.

    • The ‘invisible hand’ of the free market would resolve any disequilibrium found.

Advantages of a Free-Market Economy

  • Transmits information between buyers and sellers.

  • No need for costly bureaucracy.

  • Incentives to be efficient.

  • Competitive markets are responsive to consumers.

Problems of a Free-Market Economy

  • Competition may be limited: problem of market power.

  • Inequality.

  • Problem of poor and/or asymmetric information.

  • The environment and other social goals may be ignored.

  • May encourage greed and selfishness.

The Mixed Economy

  • Types of government intervention:

    • Taxes, subsidies, benefits, direct provision, direct control, legislation.

The Nature of Economic Reasoning

  • Positive (facts) and normative (opinions) economics.

  • Major role of economists in policymaking.