Economics Unit 1 PDF

Economics  Main tools are aggregate demand and aggregate supply of an economy as a whole. Unit 1   Helps to solve problem of full emp...

Economics  Main tools are aggregate demand and aggregate supply of an economy as a whole. Unit 1   Helps to solve problem of full employment of  The word economy comes from the Greek phrase resources.  The word economics comes from the ancient  Concerned with the determination of Greek word oikonomia. oikos=>house and nomos equilibrium levels of income and employment at =>rule or custom ―”one who manages a aggregate level. household”.  Inflation is a concern of macroeconomics.  Adam Smith is known as father of economics 2. Micro Economics  An Inquiry into the Nature and Causes of Wealth  Is concerned with the economic behavior of of Nations, in the year 1776- a book by Adam is a individual decision making units such as reason for beginning of economy as a distinct households, firms, markets and industries. subject.  It deals with how households and firms make  There ain’t no universally accepted definition of decisions and how they interact in specific economy and it is defined from different markets. perspectives but the most formal one is  Its central problem is price determination and o Economics is a social science which studies allocation of resources. about efficient allocation of scarce resources so  Main tools are the demand and supply of as to attain the maximum fulfillment of particular commodities and factors. unlimited human needs.  Macroeconomics cannot be studied in isolation  Economics is a science of choice, it studies how from microeconomics. They are complementary. people choose to use scarce or limited productive  Two perspectives of Analysis of Economics resources to produce various commodities. 1. Positive Economics  Economics is concerned with doing the best with  Concerned with analysis of facts and attempts what we have. to describe the world as it is.  The rationales of economics (i.e, ለኢኮኖሚክስ  It tries to answer the questions what was; what መገኘት ምክንያት የሆኑ reasons) is; or what will be?  Human (society‘s) material wants are  It does not judge a system as good or bad, unlimited. better or worse.  Economic resources are limited (scarce)  Any disagreement on positive statements can  The basic economic problem is about scarcity and be checked by looking in to facts. choice. Choice is at the heart of all decision- 2. Normative Economics making.  It evaluates the desirability of alternative  Economy can be analyzed at micro and macro outcomes based on one‘s value judgments level (they are branches of economics) about what is good or what is bad 1. Macro Economy  Normative analysis is a matter of opinion  Deals with the effects and consequences of the (subjective in nature) which cannot be proved or aggregate behavior of all decision making units rejected with reference to facts. in a certain economy. Studies an economy as a  Any disagreement on normative economics can whole and its aggregates. be solved by voting  The fundamental objective of economics is  Deals with national income and output and establishment of t of valid generalizations about general price level certain aspects of human behavior. Those  Its central problem is determination of level of generalizations are known as theories. income and employment.  Theory is a simplified picture of reality.  Economic theory provides the basis for economic  All types of human resources, most natural analysis which uses logical reasoning. resources, all types of capital resources and all  Types of logical reasoning: types of entrepreneurial resources are scarce  Inductive Reasoning: it is the process of resources. deriving a principle or theory by moving  Categories of Economic Resources from facts to theories and from particular to  Labor: refers to the physical as well as general economic analysis. mental efforts of human beings in the Inductive method involves the following production and distribution of goods and steps. services. The reward for labor is called 1. Selecting problem for analysis wage. 2. Collection, classification, and  Land: refers to the natural resources or all analysis of data the free gifts of nature usable in the 3. Establishing cause and effect production of goods and services. The relationship between economic reward for the services of land is known as phenomena. rent.  Deductive Reasoning: It deals with  Capital: refers to all the manufactured conclusions about economic phenomenon inputs that can be used to produce other from certain fundamental assumptions or goods and services. It refers to physical truths or axioms through a process of logical capital only. It doesn’t take in to account arguments. The theory may agree or financial capital. The reward for the disagree with the real world and we should services of capital is called interest. check the validity of the theory to facts by  Entrepreneurship: refers to a special type moving from general to particular. of human talent that helps to organize and Major steps in the deductive approach manage other factors of production to include: produce goods and services and takes risk 1. Problem identification of making loses. The reward for 2. Specification of the assumptions entrepreneurship is called profit. 3. Formulating hypotheses  Scarcity does not mean shortage. 4. Testing the validity of the hypotheses  Shortage of goods and services when people are  It is often said that the central purpose of unable to get the amount they want at the economic activity is the production of goods and prevailing or on going price. services to satisfy consumer‘s needs and wants  Shortage is a specific and short term problem i.e. to meet people‘s need for consumption both but scarcity is a universal and everlasting as a means of survival and also to meet their problem. ever-growing demand for an improved lifestyle or  Choice: standard of living.  Scarcity implies choice and choice implies cost.  Scarcity:  Scarcity → limited resource → limited output →  Scarcity refers to the fact that all economic we might not satisfy all our wants →choice resources that a society needs to produce goods involves costs → opportunity cost and services are finite or limited in supply.  Opportunity cost is a scarification of alternative  It’s the most fundamental economic problem. opportunity.  Reflects the imbalance between our wants and  Opportunity Cost: the means to satisfy those wants.  Opportunity cost is the amount or value of the  Resources can be classified as free and economic next best alternative that must be sacrificed (scarce) resources.  (forgone) in order to obtain one more unit of a cost increases when we produce more of product. one good is that economic resources are not  When we say opportunity cost, we mean that: completely adaptable to alternative uses  It is measured in goods & services but not in (specialization effect). money costs  Opportunity cost increase = abs  It should be in line with the principle of ( 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑎𝑙𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑣𝑒 𝑠𝑎𝑐𝑟𝑖𝑓𝑖𝑒𝑑 ) 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑔𝑎𝑖𝑛𝑒𝑑 substitution.  Economic Growth and PPF  When opportunity cost of an activity increases  Economic growth means an increase in people substitute other activities in its place. output produced.  Production Possibility Frontier(PPC/PPF)  Conditions for occurrence of economic  It is a curve that shows the various possible growth combinations of goods and services that the  Increase in the quantity or/and quality of society can produce given its resources and economic resources. technology.  Advances in technology.  To draw PPF we need the following  Economic growth is represented by outward assumptions: shift of the PPF.  The quantity as well as quality of economic 1. Symmetrical Economic Growth: If resource available for use during the year is the change is in both sectors fixed. 2. Asymmetrical Economic Growth: If  There are two broad classes of output to be the change is in one sector produced over the year.  The economy is operating at full Basic Economic Problems (Central problems of an employment and is achieving full production economy): are economic problems faced by an (efficiency). economic system due to scarcity of resources.  Technology does not change during the year. 1. What to Produce  Some inputs are better adapted to the production of one good than to the  Also known as the problem of allocation of production of the other (specialization) resources.  Important concepts described by PPF  The economy must make choices such as  Concept of scarcity: A society can’t have consumption goods versus capital goods, civil unlimited resource even it uses them wisely. goods versus military goods, and necessity goods  Concept of choice: movement along the versus luxury goods. curve implies change of choice.  The final choice of any economy is a combination  Concept of opportunity cost: when the of the various types of goods but the exact nature economy produces on the PPF, production of the combination depends upon the specific of more of one good requires sacrificing circumstances and objectives of the economy. some of another product which is reflected 2. How to Produce by the downward sloping PPF.  Also known as the problem of choice of  Law of increasing opportunity cost: This law technique. states that as we produce more and more of  The various techniques of production can be a product, the opportunity cost per unit of classified into two groups: labour intensive the additional output increases. This makes techniques and capital-intensive techniques. the shape of the PPF concave to the origin.  Labour intensive techniques: involves the use of This makes the slope of PPF graph concave more labour relative to capital, per unit of to the origin.The reason why opportunity output   Capital intensive technique: involves the use of others. Yeand firm decission lela firmn ligoda more capital relative to labour, per unit of yichlal. output.  Advantages of CES:  The choice between different techniques  Flexibility depends on the available supplies of different  Decentralization of economic power factors of production and their relative prices.  Increase of per-capital income and standard of 3. For whom to produce living  Also known as the problem of distribution of  New types of consumer goods national product.  Growth of entrepreneurship  An economy that wants to benefit the maximum  Optimum utilization of productive resources number of persons would first try to produce the  High rate of capital formation necessities of the whole population and then to  Disadvantages of CES: proceed to the production of luxury goods.  Inequality of income An economic system is a set of organizational and  Exploitation of labour institutional arrangements established to answer  Negative Externality the basic economic questions.  Unbalanced economic activity 1. Capitalist Economic System 2. Command Economic System  Is oldest formal es in the world  Also known as socialist economic system  Began in mid-19th century  The economic institutions that are engaged in  Government intervention is minimal in this es production and distribution are owned and  Also called free market economy or market controlled by the state. system or laissez faire  Features of CoES  Features of CES:  Collective ownership: Everything is owned by  The right to private property: private ownership society of land and other stuff in private  Central economic planning  Freedom of choice by consumers: also known as  Strong government role the principle of consumer sovereignty.  Maximum social welfare: Command economy  Profit motive: Entrepreneurs are guided by the aims at maximizing social welfare and does not motive of Profit Making. allow the exploitation of labour.  Competition: there is competition in  Relative equality of incomes: Private ownership consumers, employers and workers doesn’t exist in social economy. Also profit  Price mechanism: All basic economic problems motive is absent and no accumulation of wealth. are solved through the price mechanism.  Advantages of CoES:  Minor role of government: government  Absence of wasteful competition confines itself to maintenance of law and order.  Balanced economic growth  Self-interest: Each individual is guided by self-  Elimination of private monopolies and interest and motivated by the desire for inequalities economic gain.  Disadvantage of CoES:  Inequalities of income: gap between poor and  Absence of automatic price determination rich.  Absence of incentives for hard work and  Existence of negative externalities: A negative efficiency: the economy grows at relatively slow externality is the harm, cost, or inconvenience rate. suffered by a third party because of actions by  Lack of economic freedom  Red-tapism 3. Mixed Economic System(MES) b. Buying of goods and service 2. Firm  Incorporates advantages of both systems  Features of MES:  A firm is a production unit that uses economic resources to produce goods and services. Firms  Co-existence of public and private sectors: also make two decisions: Industries of national and strategic importance, a. Buying of economic resources such as heavy and basic industry, defense production, power generation, etc. are set up in b. Selling of their products the public sector, whereas consumer-goods 3. Government industry and small-scale industry are developed  A government is an organization that has legal through the private sector. and political power to control or influence  Economic Welfare: Economic welfare is the households, firms and markets. Government also most important criterion of the success of a provides some types of goods and services known mixed economy as public goods and services for the society.  Economic Planning The 3 economic agents interact in the two  Price Mechanism: the price mechanism operates for goods produced in the private markets: sector, but not for essential commodities and  Product market: it is a market where goods and goods produced in the public sector. Those services are transacted/ exchanged. That is, a prices are defined and regulated by the market where households and governments buy government. goods and services from business firms.  Economic Equality: wealth accumulation  Factor market (input market): it is a market where yichalal gn limit alew. Progressive taxation, concessions and subsides are implemented to economic units transact/exchange factors of achieve economic equality production (inputs). In this market, owners of resources (households) sell their resources to  Advantages of MES: business firms and governments.  Private property, profit motive and price mechanism  The circular-flow diagram is a visual model of  Adequate freedom the economy that shows how money (Birr),  Rapid and planned economic development economic resources and goods and services  Social welfare and fewer economic inequalities flows through markets among the decision  Disadvantages of MES: making units.  Ineffectiveness and inefficiency: A mixed  Two sector model involves household and economy might not actually have the usual firms advantages of either the public sector or the  Three sector model involves household, private sector. The public sector might be firms and government. The main source of inefficient due to lack of incentive and revenue to the government is the tax responsibility, and the private sector might be collected from households and firms. made ineffective by government regulation and control.  Economic Fluctuations  Corruption and black markets Decision making units in closed economy 1. Household  are people that live under same roof and make jointed financial supply. They make 2 decisions. a. Selling of their resources, and Unit Two 