Introduction to Economics Lecture 1 PDF

Lecture 1 Introduction Introduction to economics www.google.pl 1  The word „economics” comes from a Greek words „oikos” and „nomos”: the one who manages a household. www.google.pl Defin...

Lecture 1 Introduction Introduction to economics www.google.pl 1  The word „economics” comes from a Greek words „oikos” and „nomos”: the one who manages a household. www.google.pl Definition of economics It’s the social science concerned with analyzing and explaining human decisions about the allocation of limited resources. 2  Definition of economics: science, how we efficiently use limited resources to satisfy unlimited wants. Opportunity cost – the value of something that could be done, made, chosen, etc., that will be lost once a decision is taken to do a particular thing, – highly valued alternative that has to be sacrificed to attain something, the second best alternative. 3 Three fundamental questions: What to produce? How to produce? For whom to produce? What? Goods, that people want to buy and can buy – are able to buy! What do people buy? What is the most popular product among young/older people? What is important when people go shopping? What factors determine buying goods? 4  How? On the market economy: – profit maximisation – the most important rule! – the use of new technology, – protection of the environment! Profit maximisation Possibilities: ✓ Fixed revenues (fixed price) and costs minimisation -> we minimize costs while maintaining fixed revenues You cannot raise prices of your products - because if you raise the price, no one will buy the products - you have to reduce costs). This is a typical situation on the market economy. ✓ You have to take care of quality, building strong relationships between your company and customers! Fixed costs and higher revenues, prices, You do not care about costs because consumers can only buy your product - MONOPOLYs maximisation -> you can raise a price and dont care about costes 5  For whom? Everyone who is able to buy goods Companies create demand for their products! Economics teaches us to: ✓think in terms of alternatives ✓think about costs and profits of individual and social choices ✓understand how economic categories are related 6  Microeconomics vs. macroeconomics microeconomics - the study of individual economic agents and individual markets, macroeconomics - the study of economic aggregates. Microeconomics Single markets, demands and supply on single markets, companies’ production behavior, cost of functioning. Macroeconomics The unemployment rate, inflation, interest rate, government budgets, fiscal policy, monetary policy, economic growth. 7  Economics model Economists use models to simplify the reality in order to improve our understanding of the world the most basic economic models include: – The Circular Flow Diagram 8  Positive and normative analysis positive economics – try to describe how the economy functions normative economics – to evaluate and recommend instruments of economy policy. Economic resources any person or thing, that is used for producing goods or providing services. 9  Economic resources Land – natural resources, the “free” gifts of nature Labor – the contribution of human beings Capital – plant and equipment – this differs from “financial capital” Entrepreneurial abilities LAND all natural resources such as mineral deposits, plants and animals, crops, water, wind, solar energy, seafood that can be used in production. ( 10  LABOR productive services provided by human beings, including physical effort, skills, intellectual abilities and applied knowledge. CAPITAL Goods used in the production of other goods or services that have also been produced thanks to prior human activities. 11 Can we grade the importance of the resources? Is it possible to say which of these resources is the most important and which is the least important? If so, which one is the most important one? If not, why not? LAND LABOR CAPITAL ENTREPRENEURSHIP PRODUCTION 12  Resource payments (types of income for used resources) Economic Resources Resource payment land rent labor wages, sallary capital interest rate entrepreneurial ability profit In the economy nothing is free, we have to always pay for the resources as Milton Friedman (awarded the 1976 Nobel Prize) said: „there is no such thing as a free lunch”. The principle of rationality – the fundamental rule of economic activity out of limited amount of resources - get the maximum of what is possible. 13 Thank You for You Attention 14