Lecture 2 - Economic systems (01/10/25)
Positive economics - based on fact and proof
Normative economics - based on opinions - value judgements and subjective
E.g. government should spend more money on particular function
Microeconomics
Individual —> firm —> household —> government
A firm is a business - especially one with multiple owners and employees
Macroeconomics
Focuses on the whole economy or the agggregate economy
Demand and supply
Total output of the economy
Inflation
Rate of inflation
Balance of trade
cession
Unemployment
Demand side policy
Supply side policy
Opportunity cost
- the cost of any activity in terms of the best al forgone Sloman 2022
Allocation decision necessitates sacrifice
Economic system facilitates allocation decision
Rational choice
Economic efficiency:
A situation where each good is produced at the minimum cost and where Individual people and firm get the maximum benefit from their resources.
Productive chiclency:
A situation where firms are producing the maximum output for a given amount of inpurs, or producing a given output at the least cost Allocative Eficiency: A situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income.
Note that redistribution of income would lead to a different combination of goods that was allocatively efficent
Marginal costs - the additional costs of doing a little bit more of an activity
Marginal benefits - the additional benefit of doing a little bit more of an activity
What is a production possibility curve?
ADD IN GRAPH
The circular flow of income
The goods market and the income market
Money flows from consumer expenditure purchasing goods from the firm
Factor market - how are the goods produced?
Economic system
Operating system
households
Firms
Government
Command economy
Planned state orientated
Attempts to solve the economic problems
State allocates resources through planning mechanism
characterise by choice and productivity issues
Economy controlled
high investment high growth
Stable growth
Social goals
Low unemployment
Problems of gathering info
Expensive to administer
Shortages and surpluses
Inappropriate incentives
Mixed economy
Market dominant limited state involvement
Individual economic freedom
Market forces set prices
Government involvement - provision of public goods and services
address issue of equality
Economy managed
Producer society
First half of century
Producer dominance
Comparatively limited consumer choice
Comparatively low disposables incomes
E.g. Henry ford
Consumer society
Second half of century Producer dominance
Consumer sovereignty
Wide choice
Higher disposable income
E.g internet
Free market economy
Little or no government interference
Market mechanism allocates resources
An unregulated market
advantages -
Transmit info between buyers and sellers
No need the costly bureaucracy
Incentives to be efficient
Competitive markets responsive to consumers
Disadvantages -
Competition may be limited
Inequality
Problem of poor and/or asymmetric info
May respond poorly to serious shocks such as pandemic
The environment and other social goals may be ignored
The mixed economy
Types of government intervention
Taxes, subsidies, benefits etc
Watch - how to sell drugs fast
classify economic systems by government intervention
Price mechanism
Good market - Dg - demand of a good
Shortage of commodity —> price will fall as supply drops
Factor market - Sg - the supply of a good
If demand falls price will drop to match the demand factor
The nature of economic reasoning
Economics of social science
difficulties in conducting controlled experiments in may parts of the subject
Problems of predicting human behaviour
Economics and policy