Economics Lecture Presentation PDF

1 WHAT IS ECONOMICS? Chapter Outline (A) Why to Study Economics? (B) What to Study in Economics? (C) How to Study Economics? © 2016 Pearson Education (A) Why to Study Economics? The importance of economics stems from scarcity. Scarce...

1 WHAT IS ECONOMICS? Chapter Outline (A) Why to Study Economics? (B) What to Study in Economics? (C) How to Study Economics? © 2016 Pearson Education (A) Why to Study Economics? The importance of economics stems from scarcity. Scarce Unlimited Resources Wants Choice and Opportunity Cost © 2016 Pearson Education (A) Why to Study Economics? Our inability to satisfy all our wants is called scarcity. Because we face scarcity, we must make choices. Opportunity cost is what you must give up to get something else. The choices we make depend on the incentives we face. An incentive is a reward that encourages an action or a penalty that discourages an action. Examples on Incentives: 1- Property rights 2- Market prices © 2016 Pearson Education (A) Why to Study Economics? Definition of Economics Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. © 2016 Pearson Education (B) What to Study in Economics? There are two main parts in economics: microeconomics and macroeconomics Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. Microeconomics focuses on a certain market or industry or sector. An example of a microeconomic question is: Why are people buying more e-books and fewer hard copy books? © 2016 Pearson Education (B) What to Study in Economics? Macroeconomics is the study of the performance of the national and global economies. Macroeconomics focuses on the whole economy. An example of a macroeconomic question is: Why is the unemployment rate in the United States so high? © 2016 Pearson Education (B) What to Study in Economics? Classify each of the following as micro or macro: 1-What determines how individuals spend their budgets? Micro 2-What determines the level of production in an economy? Macro 3-What are the causes of inflation in the economy? Macro 4-What are the effects of government policies on the production of computers industry? Micro © 2016 Pearson Education (B) What to Study in Economics? Due to scarcity, any economy should answer three central economic questions: What to How to produce? produce? For Whom to produce? © 2016 Pearson Education (B) What to Study in Economics? Goods and services are the objects that people value and produce to satisfy human wants. What to produce and in what quantities? Three main sectors: agriculture, manufacturing, and services. The share of each sector in total production or GDP (Gross Domestic Product) differs from one country to another. © 2016 Pearson Education (B) What to Study in Economics? © 2016 Pearson Education (B) What to Study in Economics? GDP by Sector in Egypt during 2013 - 2023 © 2016 Pearson Education (B) What to Study in Economics? How to produce? Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: Land Labor Capital Entrepreneurship © 2016 Pearson Education (B) What to Study in Economics? The “gifts of nature” that we use to produce goods and services are land. The work time and work effort that people devote to producing goods and services is labor. Human capital is the knowledge and skill that people obtain from education, on-the-job training, and work experience. © 2016 Pearson Education (B) What to Study in Economics? The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services are capital. Capital here refers to physical capital. Financial capital (such as money and stocks) is not a factor of production, as it does not contribute directly to production of goods and services. The human resource that organizes land, labor, and capital is entrepreneurship. © 2016 Pearson Education (B) What to Study in Economics? For Whom to produce? Who gets the goods and services depends on the incomes that people earn. Land earns rent. Labor earns wages. Capital earns interest. Entrepreneurship earns profit. © 2016 Pearson Education (C) How to Study in Economics? The Economic Way of Thinking Six key ideas define the economic way of thinking: 1- A choice is a tradeoff. 2- People make rational choices by comparing benefits and costs. 3- Benefit is what you gain from something. 4- Cost is what you must give up to get something. 5- Most choices are “how-much” choices made at the margin. 6- Choices respond to incentives. © 2016 Pearson Education (C) How to Study in Economics? 1- A choice is a tradeoff Every choice is a tradeoff (an exchange); that is, giving up one thing to get something else. Such a tradeoff results in an opportunity cost. Example: Studying versus Having Fun You can’t study and have fun at the same time, so you must make a choice between studying and having fun in your weekend. © 2016 Pearson Education (C) How to Study in Economics? 2- Making a Rational Choice A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice. Only the wants of the person making a choice are relevant to determine its rationality. © 2016 Pearson Education (C) How to Study in Economics? 3- Benefit: What you Gain The benefit of something is the gain or pleasure that it brings and is determined by preferences. Preferences are what a person likes and dislikes and the intensity of those feelings. 4- Cost: What you Must Give Up The opportunity cost of something is the highest- valued alternative that must be given up to get it. Example: What is the opportunity cost of going to a movie? © 2016 Pearson Education (C) How to Study in Economics? 5- Most choices are how-much choices made at the margin The benefit from pursuing an incremental increase in an activity is its marginal benefit. The opportunity cost of pursuing an incremental increase in an activity is its marginal cost. If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity. Example: The choice to buy how much oranges © 2016 Pearson Education (C) How to Study in Economics? 6- Choices respond to incentives A change in marginal cost or a change in marginal benefit changes the incentives that we face and leads us to change our choice. The central idea of economics is that we can predict how choices will change by looking at changes in incentives. Incentives are also the key to reconciling self-interest and the social interest. Example: How could price offers change your choices? © 2016 Pearson Education (C) How to Study in Economics? Economics: A Social Science and Policy Tool Economists distinguish between two types of statement: positive statements and normative statements A positive statement can be tested by checking it against facts. A normative statement expresses an opinion and cannot be tested. © 2016 Pearson Education (C) How to Study in Economics? Example: 1- If the government cuts fuel subsidies, the government budget deficit will decrease, other things remaining the same. This is a positive statement. 2- The government should cut fuel subsidies. This is a normative statement. © 2016 Pearson Education (C) How to Study in Economics? Unscrambling Cause and Effect The task of economic science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works. Economists create and test economic models. An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. © 2016 Pearson Education (C) How to Study in Economics? © 2016 Pearson Education