economics

Definitions

• Economy - the management of the goods and services of a community, country, etc especially with a view to its production [energy & transportation are important aspects of this], distribution and consumption

• Economics - the study of economy

• Subsidies - (subventioner) a sum of money granted by the state or a public body to help an industry or business keep the price commodity/service low

• Market - a place or a situation where buyers and sellers communicate and exchange goods for money

BASIC COMPONENTS OF ECONOMY

• Needs of a society

• Resources available

*Needs - circumstances in which something is necessary, or that require some course of action

*range from

• Basic survival needs (common to all human beings)

• To cultural, intellectual, and social needs (varying from place to place and age group to age group). [“These needs vary from one society to another”]

RESOURCES

• Can be natural or human [“You need human resources to exploit natural”]

• *Natural resources: Materials or substances such as minerals, forests, water, and fertile land that occur in nature and can be used for economic gain

• *can be classified in different ways:

  • Renewable & non-renewable

  • Biotic (obtained from living things) or Abiotic (comprise nonliving things)

  • Ubiquitous (can be found everywhere, eg. air, light, water, etc.) or Localized (can only be found in certain parts of the world)

  • Ownership (Individual, community, national & international)

4 FUNDAMENTAL CONCEPTS CONCERNING THE ECONOMY OF A PLACE

[“Remember them like your family name”4]

1. Production

2. Consumption

3. Distribution

4. Economic ideologies & systems

CONSUMPTION & DISTRIBUTION

• Consumption - influenced by:

  • Market (domestic & international)

  • Political ideologies

• Distribution - Goods and/or income distribution

  • Distribution of finished commodities from areas of production to areas of consumption and involves

    • Market

    • Transportation

MICROECONOMICS

• Microeconomics (A.k.a. “The little economy”)

  • Examines the behavior of basic elements in the economy in a small society

  • Characterized by 2 actors: households & firms

  • The firms produce goods and services that the households need

  • The households supply the firms with services 

  • The market is the link between the households and firms

  • Not much involvement of banks, public sectors, foreign trade

INSERT IMAGE OF MICROECONOMICS CYCLE

MACROECONOMICS

• Macroeconomics (A.ka. “The big economy”)

  • Helps to understand how the economy of the whole society functions

  • Addresses issues including:

    • National income & output

    • Imports & exports

    • Unemployment rate

    • Price inflation

    • Economic growth

    • Total consumption

    • Expenditure

Macroeconomics studies the effect of

• Monetary policy - controls the supply of money for the purpose of promoting economic growth and stability

• Fiscal policy - the use of government expenditure and revenue collection (taxation)

Sectors/Components of Macroeconomics

• Households - all households

• Firms - involved in the production and selling of goods and services

• Public sectors - a part of the state that deals with either the production, delivery or allocation of goods and services

• Financial sector - includes banks, investment funds, insurance companies and real estate

• Foreign sectors - exports & imports

*INSERT MACROECONOMIC CYCLE

MARKET

• Market - a place or a situation where buyers and sellers communicate and exchange goods for money

• Meeting of buyers and sellers

  • With or without shops

  • Face to face or through middlemen, agents, the Internet

  • With bargainable or fixed price

  • Dealing national or foreign market (exports & imports)

DEMAND & SUPPLY

• Basic economic concepts

• A vital part of a free market economy

  • Demand - amount of goods & services bought at a given price over a period of time

    • Buyers are those that demand, that want, things in the market

  • Supply - amount of goods and services sold at a given price over a period of time

    • Sellers are those that supply, sell, the products that are demanded

PRICE, DEMAND, SUPPLY

DEMAND CURVE

• When the prices go up, the quantity demanded falls and…

• When the price falls down, the quantity demanded rises. So:

  • Demand curves show the inverse (opposite) relationship between price and quantity demanded

FACTORS THAT AFFECT THE DEMAND FOR PRODUCTS:

• Advertising

• Population (age distribution, women and men, urban and rural, number of households in the family, migration, birth rate [number of births per thousand] & death rate [number of deaths per thousand])

• Tastes & fashion [A factor for those who can afford it]

• Price substitutes (eg. coca cola & pepsi, different types of beer etc.)

• Prices of complements (buying things that go with the main product; eg. cornflakes & milk, cars and insurances)

• Interest rates (for things bought by borrowed money; high interest expensive to borrow and so demands may fall)

• Income

• Price

SUPPLY CURVE

• When prices go up, supply will also go up and…

• When prices go down, supply will also go down. So:

  • Supply curves show that there is proportionate (direct) relationship between price and quantity supplied

FACTORS THAT AFFECT THE SUPPLY OF GOODS

• Cost of production (includes labor cost, energy, raw materials etc.)

• Indirect taxes include

  • VAT/advalorem tax (Moms) - percentage of price of goods

  • Excise duties (specific/unit tax) - tax per unit sold

• Natural factors (eg. the effect of weather on agriculture)

• Prices of other goods (eg. wheat & maize, carrots & potatoes)

• Changes in technology (lowers production cost)

• Subsidies (reduce production cost) [developed, rich countries]

MAJOR FACTORS THAT INFLUENCE DEMAND & SUPPLY

• Among the factors that influence demand and supply, remember the major ones, namely

  • Price

  • Income (has high influence on the demand of buyers or consumers)

  • Cost of production (has high influence on the supply of sellers or producers)

THE INFLUENCE OF INCOME ON DEMAND

Higher income = higher demand (if the price remains the same)

THE INFLUENCE OF COST OF PRODUCTION ON SUPPLY

Higher price = larger supply (if price remains the same)

CIRCUMSTANCES WHEN SUPPLY/DEMAND INFLUENCE PRICE

• When the supply of a product/service is greater than the demand for it, the price of the product/service tends to fall

  • Examples:

    • Favorable weather conditions [(eg, ideal for production of crops)]

    • People emigrating (meaning fewer consumers)

• When the demand is greater than the supply, the price of the product/service tends to rise

  • Examples:

    • Less production in agriculture

    • Natural disasters

    • Man-made shortages

SUMMARIES

• The influence of price on demand & supply curves (inverse/opposite and direct/proportionate relationships)

• Major & minor factors that influence demand and supply of products & services

• Market equilibrium (clearing) price

• The shift of demand & supply curves (in line with income & cost of production)

• The circumstance/s when demand & supply can influence price

[Revenue = the income of a country from the goods/services sold within the country domestically

GDP - growth domestic production]

ECONOMIC BOOM (A.k.a. upswing/upturn)

• A situation when the economy is growing at a faster rate than the long run trend rate of economic growth

• A period of rapid economic expansion resulting in higher GDP, lower unemployment, a higher inflation rate and rising asset prices

• Potential causes of Economic Boom:

  • Lower interest rates: encourage firms to invest and consumers to spend (eg. buying houses)

  • Confidence of consumers and firms: borrowing money easily and cheaply (for investment and household expenditures)

  • Tax cut: may boost consumer spending

  • Rising asset prices (such as housing and stocks), create interest to buy more assets

QUESTIONS TO CONSIDER

Production

• What should be produced (the basic necessities)

• What are the production possibilities (should go hand in hand with our needs and the available resources)

• The purpose of the production (for consumption or for sale or for investments)

• The Societal institutions (like firms/companies, market, law-making offices etc.)

• The labor organization (How is the division of labor? Who does what? Who makes the decision?)

• Production materials & techniques (knowledge, competence, equipment, machines, raw materials, energy sources)

• Ecological consciousness: consideration of usage of renewable and less renewable resources

Income distribution

• Is there any fair income distribution?

• Can a government play a role in income distribution of a society?

• Should a government play a role in income distribution of a society?

• Who gets the highest income - those who do the best in the job or those who have a lot of needs?
  
  

Economic Boom

• Economic boom: summary of the major results

  • Many people earn high returns on their investments, and the economy grows

  • Rise of national output, productivity and consumers’ income

  • Strong consumer demand because of optimism about their income and work

  • Increase in sales and profits (for people in business)

  • Can lead to uncontrolled inflation (alarm for the policy makers)

  • Tend to be unsustainable and often followed by a bust - an economic recession. Hence the phrase “Boom and Bust”

image of economic boom cycle

RECESSION

image of boom/bust graph

• A trend of decline in production and employment, which in turn causes decline in incomes and spending of households

• Causes of recession:

  • Excessive debts of individuals or businesses

  • Reduction in purchases of durable household goods by consumers

  • Reduction of investment on machinery and equipment by businesses

  • Reduction of goods in stocks or inventories

Recession: Some possible measures

• Infusing some money into the system, ie. by increasing the money supply

• Reducing the interest rates

• Increased spending by the government (when possible)

• Decreased taxation

INFLATION

• A broad increase in the general price level in an economy of goods and services (not just of individual items)

• End results:

  • Reduction of the currency value over time

  • An increase in the cost of living

• Annual rate of inflation

  • The price of goods and services in a given month compared with its price in the same month one year previously

Major causes of inflation

• Declining productivity (of firms) leading to shortage and thus higher prices

• Increase of price when total demand grows faster than total supply

• Price increase of commodities like oil leading to higher costs (chain effect)

• Devaluation: increasing cost if imported goods

Measurement of inflation in households’ consumption include:

• Everyday items (food, newspapers, petrol etc.)

• Durable goods (such as furniture, PCs and washing machines, etc.)

• Services (such as hairdressing, insurance, rented housing etc.)

[Remember that the price of some products (eg. oil, electricity) is given greater weight than others]

ECONOMIC SYSTEMS AND IDEOLOGIES

• An economic system us a system if production and exchange of goods and services as well as allocation of resources in a society

• An economic ideology is a series of beliefs about how an economy should be structured and run

• Major types of economic systems

  • Self sufficient household (aka. Traditional economy)

  • Market economy

  • Planned economy

  • Mixed economy

  • Green economy

SELF SUFFICIENT HOUSEHOLD

• A system of many people in the past (but also some at present)

• Developments and changes are very slow

• Includes hunting, gathering, traditional nomad and agricultural economy

• People produced what they needed

• Sometimes known as “hand to mouth” economic system

• Not much of surplus and overconsumption

• Tradition has a big role and can be said as the “self sufficient household’s ideology”

MARKET ECONOMY

• Prices of goods/services are determined in a free price system

• Production for sales 

• Developed as a result of discoveries (industrial development) that led to

  • Mechanization (modernization) of agriculture

  • Excess human labor in agriculture

  • Movement of people to urban areas and work in industries

• Related to the Liberalist ideology which implies free economy, competition, individual freedom etc.

Characteristics of Market Economy

• Freedom of trade - anyone can start a business and have access to the market

• Many actors - many buyers and sellers and not a single actor that influences the market

• Free competition - between the different firms

• Private ownership - that may increase motivation, long term investment taking risk

• Good information - on prices, quality etc. to make wise decisions

• Laissez faire - market not influenced by government intervention

PLANNED ECONOMY

• Also referred to as “command economy”

• A system where the central government…

  • Controls means of production (industries, land etc.)

  • Makes major economic decisions (about production and distribution of goods and services)

• Originated as a result of the workers movement in the 19th century

• Related to the socialist ideology

• Main or central ideas in the planned economy:

  • Common ownership [“opposite of private ownership; owned by the community”]

  • Centralized economic planning

  • Political steering of the society’s economy

MIXED ECONOMY

• Sometimes known as “balanced economy”

• Includes a variety of private and public control (reflecting characteristics of both capitalism and socialism)

• The government interferes…

  • When the society can’t solve the economic problems or…

  • When the basic necessities are threatened

• So mixed economies are found between market and planned economies

• Mixed economy is related to the Social Liberalism ideology

GREEN ECONOMY [“if I die, let not grass grow”]

• Environmentally friendly economy that promotes health, wealth, well-being etc.

• Related to sustainable development where the basic idea is 

  • To serve the needs of the present generation

  • Without threatening the life of the future generations

GDP, GNP, GDP PER CAPITA & HUMAN DEVELOPMENT INDEX

• Gross Domestic Product (GDP) – revenue (“revenue is like the income of a country”) of all the finished goods/services in a country during a particular time period

• Gross National Product (GNP) – revenue of allgoods/services in a country produced by all of its citizens and businesses (domestic and global) during a particular period

• GDP per capita – division of GDP by the population

• Human Development Index (HDI) – index for ranking countries based on life expectancy, education, per caåita, income and gender equality