Basic economics ppt

transcript

WORKSHOP

BASIC ECONOMICS

MODULE OUTCOMES

Introduction to EconomicsSupply and demandShort term versus long termMarkets in actionMicroeconomics & macroeconomicsMacroeconomics theoryEconomic growth & developmentLabour marketExamination

INTRODUCTION TO ECONOMICS

When wants exceed the resources available to satisfy them, there is scarcity.

The condition that arises because the available resources are insufficient to satisfy wants.

Faced with scarcity, people must make choices.

Choosing more of one thing means having less of something else.

The opportunity cost of any action is the best alternative forgone.

THE ECONOMIC PROBLEM OF SCARCITY, CHOICE & OPP COST

WHAT IS ECONOMICS?

● Economics

Here are some examples of scarcity and the trade-offs associated with making choices:

• You have a limited amount of time. If you take a part-time job, each hour on the job means one less hour for study or play.

• A city has a limited amount of land. If the city uses an acre of land for a park, it has one less acre for housing, retailers, or industry.

• You have limited income this year. If you spend R70 on a music CD, that’s R70 less you have to spend on other products or to save.

The social science that studies the choices that we make as we cope with scarcity and the incentives that influence and reconcile our choices.

MICRO VS MACRO

MicroeconomicsMicroeconomics: The study of the choices that individuals and businesses make, the way these choices interact, and the influence that governments exert on these choices.

MacroeconomicsMacroeconomics: The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.

WHAT IS ECONOMICS?

The Three Key Economic Questions: What, How, and Who?

The choices made by individuals, firms, and governments answer three questions:

1 What products do we produce?

2 How do we produce the products?

3 Who consumes the products?

PLANNED, MARKET & MIXED ECONOMIES

Planned economy – the government decides how resources are allocated to the production of particular goods.

Market economy - the government plays no role in allocating resources.

Mixed economies – the government and the private sector jointly solve economic problems

WHY ECONOMICS IS WORTH STUDYING

UnderstandingEconomic ideas are all around you. You cannot ignore them. As you progress with you study of economics, you’ll gain a deeper understanding of what is going on around you.

Expanded Career OpportunitiesKnowledge of economics is vital in many fields such as banking, finance, business, management, insurance, real estate, law, government, journalism, health care and the arts.

PRODUCTION POSSIBILITIES

The PPF is a valuable tool for illustrating the effects of scarcity and its consequences.

Production Possibilities Frontier The boundary between the combinations of

goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.

Figure 1 shows thePPF for bottled water and CDs.

Each point on the graph represents a column of the table.

The line through the points is the PPF.

PRODUCTION POSSIBILITIES

The PPF puts three features of production possibilities in sharp focus:

Attainable and unattainable combinations Full employment and unemployment

PPF are faced with opportunity costs Opportunity cost is the cost of the next best

alternative sacrificed when a choice is made

OPPORTUNITY COST

Moving from C to B, the 1 CD costs 1/2 of a bottle of water.

EXPANDING PRODUCTION POSSIBILITIES

A sustained expansion of production possibilities is called economic growth.

The key factors that influence economic growth are: Technological change Expansion of human capital Capital accumulation

Technological change is the development of new goods and services and better methods of production.

Expansion of human capital comes from education and on-the-job training.

Capital accumulation is the increase in capital resources.

THE PRINCIPLE OF OPPORTUNITY COST

► FIGURE 2.2Shifting the Production Possibilities Curve

An increase in the quantity of resources or technological innovation in an economy shifts the production possibilities curve outward.

Starting from point f, a nation could produce more steel (point g), more wheat (point h), or more of both goods (points between g and h).

SUPPLY & DEMAND

DEMAND

The relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same.

Illustrate a table with a price and quantity demanded.

LAW OF DEMAND

The Law of DemandOther things remaining the same,

If the price of a good rises, the quantity demanded of that good decreases.

If the price of a good falls, the quantity demanded of that good increases.

Demand curve versus demand schedule

DEMAND

Changes in Demand Change in the quantity demanded A change in the quantity of a good that people

plan to buy that results from a change in the price of the good.

Change in demand A change in the quantity that people plan to buy

when any influence other than the price of the good changes.

DEMAND

The main influences on buying plans that change demand are:

Prices of complementary/substitute goods

Consumer Income (normal goods e.g. laptop & inferior goods e.g. Sasco bread)

Price Expectations

Number of buyers –the greater the no. of buyers in a mkt, the larger the dd for any good

Tastes & Preferences – when prefs change, the demand for items increases & dd for another item decreases

DEMAND

Demand: A Summary

SUPPLY

Quantity suppliedThe amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price.

The Law of Supply Other things remaining the same,

If the price of a good rises, the quantity supplied of that good increases.

If the price of a good falls, the quantity supplied of that good decreases.

SUPPLY

Changes in Supply Change in quantity supplied A change in the quantity of a good that suppliers

plan to sell that results from a change in the price of the good.

Change in supply A change in the quantity that suppliers plan to

sell when any influence on selling plans other than the price of the good changes.

2. When supply increases, the supply curve shifts rightward from S0 to S2.

1. When supply decreases, the supply curve shifts leftward from S0 to S1.

Figure 4.7 shows changes in supply.

SUPPLY

The main influences on selling plans that change supply are:

Prices of related goods

Prices of resources and other Inputs

Expectations

Number of sellers

Productivity

Elasticity: A Measure of Responsiveness

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THE PRICE ELASTICITY OF DEMAND

● price elasticity of demand (Ed)A measure of the responsiveness of the quantity demanded to changes in price; equal to the absolute value of the percentage change in quantity demanded divided by the percentage change in price.

● Elasticity Elastic > 1 Inelastic < 1Unitary = 1

Price Elasticity and the Demand Curve

● perfectly inelastic demandThe price elasticity of demand is zero.

► FIGURE 5.1 (cont’d.)Elasticity and Demand Curves

Price Elasticity and the Demand Curve

● perfectly elastic demandThe price elasticity of demand is infinite.

► FIGURE 5.1 (cont’d.)Elasticity and Demand Curves

Computing Percentage Changes and Elasticities

Other Determinants of the Price Elasticity of Demand

SHORT RUN VS LONG TERM

The Short Run: Fixed PlantThe short run is a time frame in which the quantities of some resources are fixed. In the short run, a firm can usually change the quantity of labor it uses but not the quantity of capital

The Long Run: Variable PlantThe long run is a time frame in which the quantities of all resources can be changed.A sunk cost is irrelevant to the firm’s decisions.

SHORT RUN vs LONG RUN

SHORT-RUN COST

SHORT-RUN PRODUCTION

To increase output with a fixed plant, a firm must increase the quantity of labor it uses.

We describe the relationship between output and the quantity of labor by using three related concepts:

Total product (total quantity produced)

Marginal product

Average product

Total Product

Total product (TP) is the total quantity of a good produced in a given period.

Total product is an output rate—the number of units produced per unit of time.

Total product increases as the quantity of labor employed increases.

Figure 9.2 shows the total product and the total product curve.

Points A through H on the curve correspondto the columns of the table.

The TP curve is like the PPF: It separates attainable points and unattainable points.

Marginal Product Marginal product is the change in total product

that results from a one-unit increase in the quantity of labor employed.

It tells us the contribution to total product of adding one more worker.

When the quantity of labor increases by more (or less) than one worker, calculate marginal product as:Marginal product

Change in total product

Change in quantity of labor=

The table calculates marginal productand the orange bars in part (b) illustrate it.

Notice that the steeper the slope of the TP curve, the greater is marginal product.

The total product and marginal product curves in this figure incorporate a feature of all production processes:

• Increasing marginal returns initially

• Decreasing marginal returns eventually

• Negative marginal returns

Increasing Marginal Returns Increasing marginal returns occur when the

marginal product of an additional worker exceeds the marginal product of the previous worker.

Increasing marginal returns occur when a small number of workers are employed and arise from increased specialization and division of labor in the production process.

Decreasing Marginal Returns Decreasing marginal returns occur when the

marginal product of an additional worker is less than the marginal product of the previous worker.

Decreasing marginal returns arise from the fact that more and more workers use the same equipment and work space.

As more workers are employed, there is less and less that is productive for the additional worker to do.

Decreasing marginal returns are so pervasive that they qualify for the status of a law:

The law of decreasing returns states that:

As a firm uses more of a variable input,

with a given quantity of fixed inputs, the

marginal product of the variable input

eventually decreases.

Average ProductAverage product is the total product per worker employed. It is calculated as:Average product = Total product Quantity of laborAnother name for average product is productivity.

SHORT-RUN PRODUCTIONWhen marginal product is less than average product, average product is decreasing.

When marginal product equalsaverage product, average product is at its maximum.

9.3 SHORT-RUN COST

To produce more output in the short run, a firm employs more labor, which means it must increase its costs.

We describe the relationship between output and cost using three cost concepts:

Total cost Marginal cost Average cost

9.3 SHORT-RUN COST

Total Cost

A firm’s total cost (TC) is the cost of all the factors of production the firm uses.

Total cost divides into two parts: Total fixed cost (TFC) is the cost of a firm’s

fixed factors of production used by a firm—the cost of land, capital, and entrepreneurship.

Total fixed cost doesn’t change as output changes.

9.3 SHORT-RUN COST Total variable cost (TVC) is the cost of the variable

factor of production used by a firm—the cost of labor. To change its output in the short run, a firm must

change the quantity of labor it employs, so total variable cost changes as output changes.

Total cost is the sum of total fixed cost and total variable cost. That is,

TC = TFC + TVC Table 9.2 on the next slide shows Sam’s Smoothies’

costs.

SHORT-RUN COST

Figure 9.6 shows Sam’s Smoothies’ total cost curves.

Total fixed cost (TFC) is constant—it graphs as a horizontal line.

Total cost (TC) also increases as output increases.

Total variable cost (TVC) increases as output increases.

SHORT-RUN COST

The vertical distance between the total cost curve and the total variable cost curve is total fixed cost, as illustrated by the two arrows.

SHORT-RUN COST

Marginal cost

A firm’s marginal cost is the change in total cost that results from a one-unit increase in total product.

Marginal cost tells us how total cost changes as total product changes.

Table 9.3 on the next slide calculates marginal cost for Sam’s Smoothies.

SHORT-RUN COST

Average Cost There are three average cost concepts: Average fixed cost (AFC) is total fixed cost per

unit of output. Average variable cost (AVC) is total variable

cost per unit of output. Average total cost (ATC) is total cost per unit of

output.

SHORT-RUN COST

The average cost concepts are calculated from the total cost concepts as follows:

TC = TFC + TVCDivide each total cost term by the quantity produced, Q, to give

ATC = AFC + AVC

Q Q QTC = TFC + TVC

SHORT-RUN COST

The marginal cost curve (MC) is U-shaped and intersects the average variable cost curve and the average total cost curve at their minimum points.

The vertical distance between these two curves is equal to average fixed cost, as illustrated by the two arrows.

Plant Size and Cost When a firm changes its plant size, its cost of

producing a given output changes. Each of these three outcomes arise because when a

firm changes the size of its plant, it might experience:

Economies of scale Diseconomies of scale Constant returns to scale

LONG-RUN COST

PRODUCTION AND COST IN THE LONG RUN

Economies of Scale, Diseconomies of scale and constant returns

● economies of scaleA situation in which the long-run average cost of production decreases as output increases.

● diseconomies of scaleA situation in which the long-run average cost of production increases as output increases.

● Constant return s to scaleExist when a firm increases plant size and labour employed by the same percentage, its output increases by the same percentage and average total cost remains constant

The Long-Run Average Cost Curve The long-run average cost curve shows the

lowest average cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed.

9.4 LONG-RUN COST

LONG-RUN COST

The long-run average cost curve, LRAC, traces the lowest attainable average total cost of producing each output.

In the long run, Samantha can vary both capital and labor inputs.

12.4 LONG-RUN COST

Sam’s experiences economies of scale as output increases to 9 gallons an hour, …

constant returns to scale for outputs between 9 gallons and 12 gallons an hour, …

and diseconomies of scale for outputs that exceed 12 gallons an hour.

MARKETS IN ACTION

MARKET EQUILIBRIUM

1. Excess demand cause the price to rise

2. Excess supply cause the price to drop

● market equilibriumA situation in which the quantity demanded equals the quantity supplied at the prevailing market price.

DEMAND

Demand: A Summary

SUPPLY - SUMMARY

Supply: A Summary

ELASTICITY & CHANGES IN THE EQUILIBRIUM

Equilibrium price and equilibrium quantity in a given market are determined by the intersection of the supply and demand curves.

Depending on the elasticities of supply and demand, the equilibrium price and quantity can behave differently with shifts in supply and demand.

If demand is very elastic, then shifts in the supply curve will result in large changes in quantity demanded and small changes in price at the equilibrium point.

If demand is very inelastic, however, then shifts in the supply curve will result in large changes in price and small changes in quantity at the equilibrium point.

MACRO VS MICROECONOMICS

MICRO VS MACRO

MicroeconomicsMicroeconomics: The study of the choices that individuals and businesses make, the way these choices interact, and the influence that governments exert on these choices.

MacroeconomicsMacroeconomics: The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.

Will tomorrow’s world be more prosperous than today?

Will jobs be plentiful? Will the cost of living be stable? Will the government and the nation remain in

deficit?

Macroeconomics questions

Five widely agreed policy challenges for macroeconomics are to:

1. Boost economic growth

2. External stability/balance of payments

3. Lower unemployment / Full employment

4. Price stability

5. Equitable distribution of wealth (income)

Macroeconomic Policy Challenges and Tools

Two broad groups of macroeconomic policy tools are :

Fiscal policy—making changes in tax rates and government spending

Monetary policy—changing interest rates and changing the amount of money in the economy

Macroeconomic Policy Challenges and Tools

The Circular Flow

This model captures the essential essence of macroeconomic activity

The circular flow model illustrates the mechanism by which income is generated from goods and services and how this income is spent.

This provides the basis for the way economists think about the interactions between different parts of the economy and the measurement of economic activity

The Circular Flow of income n spending

MACROECONOMICS THEORY

MACROECONOMIC VARIABLES

Gross Domestic Product (GDP) Inflation Unemployment Balance of payments

Gross Domestic Product

GDP Defined GDP or gross domestic product, is the market

value of all final goods and services produced in a country in a given time period.

This definition has four parts: Market value Final goods and services Produced within a country In a given time period

Market Value GDP is a market value goods and services are

valued at their market prices. To add apples and oranges, computers and ice

cream, we add the market values so we have a total value of output in rands.

Final Goods and Services GDP is the value of the final goods and

services produced. A final good (or service) is an item bought by

its final user during a specified time period. A final good contrasts with an intermediate

good, which is an item that is produced by one firm, bought by another firm and used as a component of a final good or service.

Excluding intermediate goods and services avoids a problem called double counting.

Produced Within a Country GDP measures production within a country domestic

production. In a Given Time Period GDP measures production during a specific time period

Excluding intermediate goods and services avoids double counting normally a year or a quarter of a year.

GDP, INCOME, AND EXPENDITURE

Figure 1 shows the circular flow of income and expenditure.

Real GDP is the value of final goods and services produced in a given year when valued at constant prices.

The first step in calculating real GDP is to calculate nominal GDP.

Nominal GDP Nominal GDP is the value of goods and

services produced during a given year valued at the prices that prevailed in that same year.

Nominal vs Real GDP

Inflation is a a continuos and considerable rise in price level in general.

The commonly used indicator of general price level is the CPI

To calculate inflation rate - is the percentage change in the price level.

Inflation

100(P1 – P0) P0

Is Inflation a Problem? Unpredictable changes in the inflation rate are a problem

because they redistribute income in arbitrary ways between employers and workers and between borrowers and lenders.

A high inflation rate is a problem because it diverts resources from productive activities to inflation forecasting.

Eradicating inflation is costly because it brings a period of greater than average unemployment.

Inflation

When an inflation occurs ____________. all prices are rising oil prices are rising all families are spending more money on food prices on the average are rising

Unemployment is a state in which a person does not have a job but is available for work, willing to work, and has made some effort to find work within the previous four weeks.

Types of Unemployment Frictional unemployment Structural unemployment Cyclical unemployment Seasonal unemployment Disguised/ Hidden unemployment

Unemployment defined

Frictional unemployment – This is unemployment caused by people moving in between jobs, e.g. graduates or people changing jobs. There will always be some frictional unemployment.

Unemployment

Structural unemployment is unemployment created by changes in technology and foreign competition that change the skills and location match between jobs and workers.

Cyclical unemployment is the fluctuation in unemployment caused by the business cycle e.g. in a recession AD & thus output falls.

Unemployment

Seasonal unemployment is occurs when employees only work during a certain time(s) of the year and therefore during other months they are regarded as unemployed.

Disguised/Hidden unemployed is said to exist if people who were previously fully employed, have had their hours.(& salaries) reduced because of poor business performance

Unemployment

Why Unemployment Is a Problem Unemployment is a serious economic, social, and

personal problem for two main reasons: Lost production and incomes Lost human capital

Lost production and income is serious but temporary.

Lost human capital is devastating and permanent.

Costs of unemployment

Balance of payments

A country’s balance of payments accounts records its international trading, borrowing and lending. It consists of 4 basic accounts:

1. Current account – reflects the rand value of the goods and services exported and imported during the period

2. Capital account – records all international borrowing and lending.

3. Financial account-international transactions involving financial assets including the borrowing & lending of funds

4. Unrecorded transactions- all errors & ommissions that occur in compiling the individual components of the BOP.

ECONOMIC GROWTH & DVPT

Economic growth is the expansion of the economy’s production possibilities—an outward shifting PPF.We measure economic growth by the increase in real GDP.Real GDP—real gross domestic product—is the value of the total production of all the nation’s farms, factories, shops, and offices, measured in the prices of a single year.

Economic Growth

The Causes of Economic Growth: A First Look

For economic growth to persist, people must face incentives that encourage them to pursue three activities

Saving and investment in new capital Investment in human capital Discovery of new technologies An increase in labour supply Decrease in human capital Increase in productivity

The Causes of Economic Growth

Saving and Investment in New Capital The accumulation of capital has dramatically increased

output and productivity.

Investment in Human Capital Human capital acquired through education, on-the-job

training, and learning-by-doing has also dramatically increased output and productivity.

Discovery of New Technologies Technological advances have contributed immensely to

increasing productivity.

Ongoing economic growth requires all of the following except _____________. saving and investment in new capital the discovery of new technologies population growth investment in human capital

Measuring Economic Growth

When GDP increases, we know that eitherWe produced more goods and services orWe paid higher prices

Producing more goods and services contributes to an improvement in our standard of living.

Expansion of production is economic growth.

Economic growth is not a smooth process and hence is related to a phenomenon called business cycle

The business cycle is a pattern of upswing (expansion) and downswing (contraction) in the economy.

These cycles differ according to the role of outside force and basic system design.

Business Cycle Patterns

BUSINESS CYCLE

Figure 1.1 shows a business cycle.

An expansion ends at a peak and a recession ends at a trough.

Every business cycle has two phases: 1. A recession - is a period during which real GDP

decreases for at least two successive quarters. 2. An expansion - is a period during which real

GDP increases. and two turning points: 1. A peak 2. A trough

Economic Growth

All theories of the business cycle agree that investment and the accumulation of capital play a crucial role.

Recessions begin when investment slows and recessions turn into expansions when investment increases.

Investment and capital are crucial parts of cycles, but are not the only important parts.

Cycle Patterns, Impulses and Mechanisms

Causes of fluctuations in actual growth In the short-run

Variations in the growth of aggregate demand – total spending on goods and services made within a country

In the long-run The growth in Aggregate demand. This determines

whether potential output will be realised The growth in potential output

Causes of fluctuations in actual growth

Benefits and Costs of Economic Growth The main benefit of long-term economic growth is

expanded consumption possibilities, including more health care for the poor and elderly, more research on cancer and AIDS, better roads, more and better housing and a cleaner environment.

The costs of economic growth are forgone consumption in the present, more rapid depletion of non-renewable natural resources, and more frequent job changes.

Economic Growth

THE LABOUR MARKET

The Labour Market

The market for a factor of production - labour

Refers to the demand for labour – by employers and the supply of labour (provided by potential employees) The demand for labour is dependent on the

demand for the final product that labour produces.The greater the demand for office space the higher the demand for construction workers.Copyright: Bo de Visser, stock.xchng

The Labour Market

The labour market is an example of a factor marketSupply of labour – those people seeking employment (employees)Demand for labour – from employers A ‘Derived Demand’ – not wanted for its own sake but for what it

can contribute to production Demand for labour related to productivity of labour and the level

of demand for the product Elasticity of demand for labour related to

the elasticity of demand for the product

The Labour Market

At higher wage rates the demand for labour will be less than at lower wage rates

Reason linked to Marginal Productivity Theory

The demand for labour is highly dependent on the productivity of the worker – the more the worker adds to revenue, the higher the demand.Copyright: iStock.com

The MRP curve therefore represents the demand curve for labour illustrating the derived demand relationship.

Wage Rate (£ per hour)

Number Employed

10 15 19

There is an inverse relationship between the wage rate and the number of people employed by the firm.

The Labour Market

The market demand for labour will shift or change due to: The number of firms or employers changes The number of product changes The productivity of labour changes There is a new substitute for labour The price of substitute changes The price of a complementary factor of production

changes

The Labour MarketWage Rate (£ per week)

Quantity of labour employed

The demand for labour is downward sloping from left to right

At a relatively high wage rate of £250 per week, the value added by the worker must be greater to cover the cost of hiring that labour. Demand is likely to be lower.

At a lower wage rate the firm can afford to take on more workers. The demand for labour is inversely related to the wage rate

The demand for labour will shift if:

• Productivity of labour increases

• New machinery is used which increases productivity

• If there is an increase in the demand for the good/service itself

• If the price of the good/service increases

The Labour Market

The Supply of LabourThe amount of people offering their labour at different wage rates. Involves an opportunity cost – work v. leisure Wage rate must be sufficient

to overcome the opportunity cost of leisure

The Labour Market

The market supply of labour will shift or change due to: Tastes (for leisure, income and work) Income and wealth Expectations (for income or consumption) Skill levels required Size and structure of the population – age, gender, etc. Opportunity cost of work – income and substitution

effects

The Labour Market

Income effect of a rise in wages: As wages rise, people feel better off and therefore may not feel a

need to work as many hours

Substitution effect of a rise in wages: As wages rise, the opportunity cost of leisure rises (the cost of

every extra hour taken in leisure rises). As wages rise, the substitution effect may lead to more hours being worked.

The net effect depends on the relative strength of the income and substitution effects

The Labour MarketWage Rate (£ per hour)

Number employed

The market wage rate for a particular occupation therefore will occur at the intersection of the demand and supply of labour.

The wage rate will alter if there is a shift in either or both the demand and supply of labour.

A rise in the demand for labour would force up the wage rate as there would be excess demand for labour.

Excess Demand

The Labour MarketWage Rate (£ per hour)

Number employed

Excess Supply

An increase in the supply of labour would lead to a fall in the wage rate as there would be an excess supply of labour.

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