Welcometo the Wonderful World of Economics

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The word "economics“has its origin in the Greek "oikonomikós" (relating to householdmanagement), from "oikos" (house).

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Economics studies how society manages its scarce resources.----------------------------------------How people make decisions:

How much they work,What they buy, How much they save or invest...

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Economics studies how society manages its scarce resources. ----------------------------------------How people interactwith each other:

How buyers and sellersTogether determine the price, and quantity of goods sold...

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Economics studies how society manages its scarce resources ----------------------------------------How the Economy as a Whole Works:

Analyze the forces and trendsthat affect the economy:Growth in average income,unemployment, inflation etc.

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Economics studies how society manages its scarce resources ----------------------------------------

How People Make Decisions “ ”

Four Principles of Individual Decision-Making

Efficiency or Equity?

1

b

People Face Trade-offs

a

c Good decisions are made when options are known

Guns or Butter?

Four Principles of Individual Decision-Making

Some costs are ignored

2

b

Cost is What You Give-Up

a

c Opportunity Cost is whatever must be given up to obtain some item

Not all costs are perceived

Four Principles of Individual Decision-Making

Marginal changes are small incremental adjustments to a plan of action

3

b

Rational People Think at the Margin

a

c Marginal costs and marginal benefits are compared to make decisions

Decisions are rarely black and white

Four Principles of Individual Decision-Making

There are direct and indirect costs and benefits

4

b

People Respond to Incentives

a

c Incentives and opportunity costsare compared in decision making

Behaviour changes, as costs or benefits change

How People Interact“ ”

Three Principles of Individual Interaction

Isolation to Specialisation

1

b

Trade Makes EveryoneBetter Off

a

c Partners in Progress

Competition and Trade is not a Win-Lose Affair

Three Principles of Individual Interaction

Adam Smith: “Invisible Hand” leads to desirable outcomes

2

b

Markets Usually Organize Economic Activities Efficiently

a

c Communism: Controls prevent self-correction and affect welfare of society as a whole

Market Economy: Resource allocation with decentralised decision making as individual and firms interact for goods and services

Three Principles of Individual Interaction

Externality: the impact of one person’sactions on the well being of another

3

b

Governments Can Sometimes Improve Market Outcomes

a

c Market Power: The ability of a single entity(or group) with substantial influence

Market failure is the failure of efficient allocation of resources

How the Economy as a Whole Works“ ”

Three Principles of the Economy as a Whole

Keys: Education , Tools and Technology

1

b

A County’s Standard of LivingDepends on Ability to ProduceGoods and Services

a

c Government Budget deficits lower investment and productivity

Standard of living is linked to productivity

Three Principles of the Economy as a Whole

Culprit: Growth in the quantityof money supply (money value?)

2

b

Prices Rise when Government Prints too Much Money

a

c Keeping inflation low is part of good public policy

Inflation: Increase in the overalllevel of prices

Three Principles of the Economy as a Whole

Restriction of money supply decreasesspending leading to less sales

3

b

Society Faces Short-run Trade off betweenInflation and Unemployment

a

cMonetary Policy and Fiscal PolicyAre the instruments of control

Reduction in inflation causestemporary increase in unemployment

Remember the 10 Building Blocks------------------------------------------------

Even the most sophisticated economic analysis is built using the ten principlesused here…

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