Economics: Essential Foundations

• Sam Filby can be reached at [email protected]
• Office hours are Tuesdays 14:00 - 16:00, Room 4.09 School of Economics building, Middle Campus

Required Reading

• Chapter 1, "Essential Foundations of Economics," Bade & Parkin, 7th edition is required.
• Chapter numbers vary across textbook editions.
• Chapter 1, 7th edition, is named "Getting Started."
• Slides provide a summary for studying.

Learning Objectives

• Define economics and explain the questions economists address.
• Understand scarcity and its role in economics.
• List and explain the four factors of production.
• Explain the circular flow of economic life.
• Distinguish different types of economic systems.
• Explain differences in Microeconomics and Macroeconomics.
• Explain ideas defining economic thinking: tradeoff, opportunity cost, benefit, marginal opportunity cost, marginal benefit, rational choice, sunk cost, incentive.

What is Economics?

• Economics studies choices of individuals, businesses, governments, and societies in coping with scarcity.
• It considers the influences on these choices, and the coordinating arrangements.

What is Scarcity?

• Scarcity reflects that our wants exceed what resources can satisfy.
• Scarcity underlies all economic questions and problems.

Scarcity in Personal Context

• The ability to satisfy wants is limited by time, income, and prices.
• Billionaires, too, face scarcity.
• Time represents a scarce resource.
• Scarcity differs from poverty.

Scarcity in Society

• Society’s ability to satisfy wants is limited by available productive resources.
• Productive resources consist of land, labor, capital, and entrepreneurship.

Factors of Production

• Labour includes work time and effort devoted to producing goods and services.
• Human capital, which measures labor quality, is part of labour.
• Wages are earned by labour owners.
• Land includes natural resources to produce goods and services.
• Rent is earned by land owners.
• Capital includes past-produced tools, machines, buildings for producing goods and services, not financial capital (money, stocks, bonds).
• Interest is earned by capital owners.
• Entrepreneurship involves skill to organize productive resources for goods & services/Innovators.
• Profit is earned by entrepreneurs.

Scarcity and Choice

• Scarcity forces choices among available options.
• Choices involve trade-offs.
• Smart choices are essential with knowledge of economics.

The Scope of Economics Questions

• How do choices determine what, how, and for whom goods and services are produced?

Scarcity Leads to What, how, and for Whom?

• What: What goods and services are produced, and in what quantities?
• Consumption goods & services vs capital goods & services
• How: Which productive resources (factors of production) are used, and in what proportions?
• For Whom: How are incomes from production distributed?

Sector Contribution To economies.

• Shares of each sector have remained relatively constant over time.

Types of Economic Systems

• Economic systems include traditional, command, pure market, and mixed economies.
• Production are defined by answering “what, how & for whom goods & services are produced"

Traditional Economy

• Production and consumption are based on customs, traditions, and beliefs.
• Individuals and tribes make decisions, often based on customs, traditions, religious beliefs, and survival needs.
• Goods are produced via hunting, fishing, gathering, and harvesting.
• Everyone owns and uses the land together.
• The Inuit of Canada and the Amish Community are present-day examples.

Command Economy

• An economic system that allocates resources under the control of someone in authority.
• The government makes all economic decisions.
• Dictators or totalitarian governments are often in control of command economies.
• The government owns major industries and controls the quantity of goods produced.
• The government also controls wages.
• The government ultimately decide what to produce.
• Governemnt does planning for how to produce
• Governemnt controls Distribution for whom to produce

Modern Command Economy

• North Korea serves as the best current example.
• The government makes all economic decisions.
• Nearly all important factories and industries are government-owned.
• It's one of the world's least economically open states.
• The Communist party controls the government and the economy, but the Premier has the most power.

Market Economy

• Economy where businesses (owned by individuals) make decisions based on consumer demands.
• Price of goods are determined by The interaction of supply and demand
• Limited government involvement.
• “Hands off” (Laissez-faire).
• Competition helps to regulate economic activities.
• Consumers decide what is produced depending on demand.
• Supply is determined by Businesses .
• Consumers’ income determine “for whom”.
• England/Great Britain & U.S during the Industrial Revolution

Mixed Economy

• Most economic systems combine market and command methods.
• Businesses are often where production decisions came from by the consumer demands.
• Supply and demand together determine the price of goods.
• Still Governemnt makes the final decisions
• Regulator trade
• Ensures cosnumer safety
• Protects environments
• Consumer decides what to produce depemding on demand and government regulations.
• Business how to produce witth the regulation coming from the government.
• Consumer welfare and social welfare help determine whom to produce
• Most countries, including South Africa, operate mixed economies today.

The Course Perspective

• This course follows a "mixed system”.
• The economy’s, businesses and individual decision-makers interact to determine what, how, and for whom goods and services are produced.

Circular Flow Model

• Markets describe the interaction between suppliers and sellers.
• The model shows expenditures and incomes from decision makers where those decisions determine what, how, and for whom goods and services are produced.

Households and Firms

• Households comprise individuals or groups living together.
• They own production factors and decide how many to provide to businesses.
• Firms organize production of goods and services.
• Firms determine quantities of factors to hire and quantities of goods and services to produce.

Markets

• Markets bring buyers and sellers together to do business (can be physical or network).
• The Factors production supply are picked and quantities chosen by the firms.
• Factor markets have productions bought and sold as services.
• Firms choose quantities of goods and services.
• Goods and Services are bought and sold in the goods markets

Circular Flow Summary

• Ultimately, money has helped pay for products services and goods needed.
• With each trip businesses are able to find those goods in households with individuals.
• Circular happens in Firms and market
• Now goverment must also be added

Governemnt in Economy

Foreign Ecinomic Sector

• The foreign sector describes all countries and institutions outside a country.
• Trade has helped both domestic and foreign industries to help create growth and imports.
• What is imported is a final desicion
• Foreign sector is another place that the economy has spending
• Imports are the goods made in the world that are bought in the domestic economy.
• Exports are goods that are sold on the domestic level

Self-Interest and the Social Interest

• Will the pursuit of self intrest benefit the larger social intrest as well?
• Self interested parties make decision on the level for the most part of whom good benefit and services benefit.
• Is money used to help resources and make them used at its best?

Defenitions

• Social intrest decisions are what will be the best overall outcome for society as a whole.
• Two defenitions can show dimensions, efficiency and equality
• Equality is a bigger pie with efficency is sharing the pie on both sides

Making Decisions

• You should be using your time and doing your best to help those who affect you the most.
• People want to act on their own decisions and act for the best.

Invisible hnad And Adam Smith

• Invisible hand has helped to benefit the larger intrest and make decision happen.

How Does That Connect in Real Life

• Trade has been used to help owners make decisions

Economics as a Social Science

• Economics is not always about numbers
• It’s a science that helps behaivior
• Unlike ohsics this is not based n real world.
• And it has uncertainty

What do Economists Study?

• To find these objective economists try to discover principles and ways
• Positive are facts that are believed "what is".
• Normative are opinions or not to to act in "what ought to be".

Testing Questions

• Economisits look at statements based on causes and effects
• What drives them to drop or fall with third party interference?
• Use these to determine economic models

Models

• There is to much change and interference in real life for economic models to be as accurate.
• To many systems
• Must check facts with the model
• Focus can be applied to micro.

Micro Versus Macro Economics

• The differences that come from macro and micro help show a better understanding on choices
• Macro studies the complete combined of a market
• Micro smaller
• But both connect on all areas

Equal Importence

• Trade in one area affects trade in another
• Price drives decisions
• Micro affect marco where those are applied

Positive Or Normative Knowledge

• Different types of knowledge that are understood should be used

Rational Decisions

• In order to use this way of logic that requires actions need to me taken if both aspects are true

The Economic way of Thinking

• With that in mind can an economy help with real world and thoughts?
• For answers think more of the next decision your going to make for the most part
• This also means weighing marginal cost benefit

Next Steps

• Understand at what opportunity you give up
• Compare these at what would make you take it again.

Benefits

• Is finding where best you can go
• Think for most is to give it up to a better level

Ration Choices

• Economically decisions happen in order to help the best fit
• As a choice you should best reach your objectives

To Find Ration Thinking

• Compare them using options or test

Real Life Example

• In certain situations they might to equal your needs.

Avoid Sunk Cost Fallacy

• People understand both the economic benefits for to help.
• Understanding how these concepts can effect all

This Helps to Have Smart Action

• To avoid mistakes look only towards the future and not what the past cost.

Sunk Cost Tips and Benefits

• Understand each choice that was missed on to the mistake.
• Trade of helps give a proper outlook to keep each cost clear.

Incentive

• You should base each choice on a positive affect or a negative one
• If this changes is the choice still with you

Incentive Helps With?

• Is a real life thing and helps business that you have to be in