ECONOMICS AND THE ECONOMY

Katalin Erds Assistant

erdosk@ktk.pte.hu

INTRODUCTION
Technical and practical information Scarcity Three basic questions of economics Opportunity cost Positive and normative economics Microeconomics and macroeconomics

Technical and practical issues

Begg-Fischer-Dornbush: Economics. 8th edition. McGraw-Hill Companies. Catalogue Exam at the end of the semester Availabilities and office hours

Economics
Three basic problems of daily living: What to produce How to produce For whom to produce Economics: study of how society decides what, how and for whom to produce Emphasizing society social sciences that study and explain human behaviour (in the production, exchange and use of goods and services) --- it is a science though method of analysis Goods: physical commodities Services: consumed only at the instant they are produced Key problem: reconcile the conflict peoples virtually limitless desires and scarcity of resources Explains how scarce resources are allocated between competing claims on their use.

The price of oil

Tripled in 1973-74, and doubled again in 1979-80 and affected people all over the world.
60 50 US$ per barrel 40 30 20 10 0
1965 1970 1975 1980 1985 1990 1995 2000

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An increase in the price of oil affects

What to produce
less oil-intensive products

How to produce
less oil-intensive techniques

For whom to produce

oil producers have more buying power, importers have less
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Economic issues
Resources are scarce if the demand at zero price would exceed the available supply. Income distribution: tells us how total income is divided between different groups or individuals. A nations income = sum of the income of all of its citizens World income = sum of all countries incomess = incomes earned by all people in the world

The distribution of world population and GNP, 2003

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Population LIC MIC HIC

GNP

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 41% in poor countries (avg. inc.: 285 GBP/year): India, China, Indonesia 44 in middle-income countries: Thailand, Brazil, Mexico and Hungary 15% in rich countries (avg. inc.: 17,162 GBP/year): US, Western Europe, Canada, Japan Income per person indicates the average standard of living. Inequality between countries reflects how goods are produced. Inequality within a country: Income comes from working + owing assets, earn rent, interest, dividends Sociteys decision about income distribution Influences for whom and what is produced (private servants)

Scarcity and the competing use of resources

Law of diminishing return: each extra worker adds less to output than the previous extra worker added. (If the other inputs are fixed.) Production possibility frontier (PPF): shows, for each output of one good, the maximum amount of the other good that can be produced. Opportunity cost of a good: quantity of other goods that must be sacrificed to get another unit of that good. Production efficiency: more output of one good can be obtained only by sacraficing output of other.

The production possibility frontier (2)

F/G = opportunity cost (=1/2)

Food output (F)

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F= 4

10

G = 8

B
Production possibility frontier Film output (G)

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Role of the market

Market: a process, by which Households decisions about consumption of alternative goods, Fimrs decisions about what and how to produce and Workers decisions about how much and for whom to work are all reconciled by adjustment of prices. Resource allocation is about crucial importance for the society handled in different ways in different societies: Command economy Mixed economy Free market

Market orientation
China Cuba Hungary Sweden UK USA

Command economy

Free market economy

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Market orientation
Command economy: the government planning office decides what will be produced, how it will be produced and for whom it will be produced. Detailed instructions are then issued to households, films and workers. Free market: markets in which governments do not intervene. Invisible hand: assertion that the individual pursuit of self-interest within free markets may allocate resources efficientl from societys viewpoint. Mixed economy: government and private sector jointly solve economic problems. Government: taxations, subsidies, provision of free services, regulates the extent to which individuals may pusue their own selfinterest. Optimal level of intervention is debated.

Positive and normative

Positive economics: studies objective or scientific explanations of how the economy works. Normative economics: offers recommendations based on personal value judgements. Recommends what should be done. Most economists have normative views. However, separation of advocacy and expert roles.

Micro and macro

Microeconomics offers a detailed treatment of individual decisions about particular commodities. Macroeconomics: emphasizes interactions in the economy as a whole. Deliberately simplifies the individual building blocks of the analysis in order to retain a manageable analysis of the complete interaction of the economy. Gross domestic product (GDP): value of total output of an economy in a given period. Aggregate price level: measures the average price of goods and services Unemployment rate: fraction of the labour force without a job but looking for work.

Thank you for your attention!

Katalin Erdos erdosk@ktk.pte.hu