paper 2 economics lecture 01 and 2
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![Page 1: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/1.jpg)
Paper 2: Economics
Lecture 1: Economic concepts
![Page 2: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/2.jpg)
Copyright 2007. Richard Tang. All rights reserved. 2Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Agenda
• Announcements
• Lecture
• Reading and preview
![Page 3: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/3.jpg)
Copyright 2007. Richard Tang. All rights reserved. 3Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
• About me
• Logistics
• How people failed in the past
• How to do well in P2 and P4
![Page 4: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/4.jpg)
Copyright 2007. Richard Tang. All rights reserved. 4Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
About me: Richard, not teacher
• Education
- AICPA, MBA, BS in accountancy
- Chicago, IL, USA
• Work experience
- Staff accountant, IL, 2000
- Foreign Business Instructor, Beijing, 2004
- AIA Lecturer, Shanghai, 2006 P2, P4, P9, P10 Others: P12 exam and English editing on AIA’s website
![Page 5: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/5.jpg)
Copyright 2007. Richard Tang. All rights reserved. 5Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
About me: Richard, not teacher
• Strengths (too many)
- Talking and using knowledge
- Working smart
- Books, network (friends working in different industries and different levels), DVDs, PPT,
• Weaknesses
- Poor health
- Can’t do useless things
![Page 6: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/6.jpg)
Copyright 2007. Richard Tang. All rights reserved. 6Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
About me: Richard, not teacher
• More me
- Email: [email protected]
- MSN: [email protected] SMS: 1-39-1780-8227
• Do not expect me to write a paragraph using SMS
• You need to EMAIL to get the PowerPoint!!!!
![Page 7: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/7.jpg)
Copyright 2007. Richard Tang. All rights reserved. 7Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
• About me
• Logistics (flow of materials; here, it means preparation)
• How people failed in the past
• How to do well in P2 and P4
![Page 8: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/8.jpg)
Copyright 2007. Richard Tang. All rights reserved. 8Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
Logistics (flow of materials; here, it means preparation)
• Syllabus (exam format)
• Schedule
- Tutorial
• Materials
![Page 9: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/9.jpg)
Copyright 2007. Richard Tang. All rights reserved. 9Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
Logistics: syllabus
• Syllabus first, always the syllabus first!
- 3 hours: choose 5 questions out of 8
• Do you have it?
• I guess not go to
- http://www.aiaworldwide.com/index.php?page=st_L4_Syllabus.php
![Page 10: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/10.jpg)
Copyright 2007. Richard Tang. All rights reserved. 10Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Click on this!!!
![Page 11: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/11.jpg)
Copyright 2007. Richard Tang. All rights reserved. 11Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
Logistics: syllabus what we have to follow
• Pay attention to the percentages
• They tell you how many questions there are for each syllabus area
![Page 12: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/12.jpg)
Copyright 2007. Richard Tang. All rights reserved. 12Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
Logistics: schedule
• Do you have it?
• I guess not
![Page 13: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/13.jpg)
Copyright 2007. Richard Tang. All rights reserved. 13Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Schedule
![Page 14: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/14.jpg)
Copyright 2007. Richard Tang. All rights reserved. 14Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
Logistics: schedule
• Tutorial
- You may have assignments (presentation)
- You are required to ask specific questions E.g. I don’t understand the first two ideas on slide 14 in
lecture 1
- More details on Wednesday and Thursday
![Page 15: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/15.jpg)
Copyright 2007. Richard Tang. All rights reserved. 15Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
• Logistics: materials- PPTs always PPTs first!
Why? Because it is better Because I used to PPTS to write the exams
- Textbook and past exam green book Most of the time, we don’t use them I will tell you when we use them
- How can you get my PPTs? Email before this Sat 11pm We only have 13 weeks for lecture
![Page 16: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/16.jpg)
Copyright 2007. Richard Tang. All rights reserved. 16Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
• About me
• Logistics
• How people failed in the past
• How to do well in P2 and P4
![Page 17: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/17.jpg)
Copyright 2007. Richard Tang. All rights reserved. 17Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
How people failed in the past
• Didn’t believe me
- Memorizing the green book or the text
• Didn’t come to class
• Didn’t write things down in class
• Didn’t ask questions
• Didn’t study
![Page 18: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/18.jpg)
Copyright 2007. Richard Tang. All rights reserved. 18Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
• About me
• Logistics
• How people failed in the past
• How to do well in P2 and P4
![Page 19: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/19.jpg)
Copyright 2007. Richard Tang. All rights reserved. 19Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
How to do well in P2 and P4 (and in anything)
• Ideas expand the ideas use the ideas
• So, you need to write things down in class
- To expand the ideas in the PPT
• Ask questions when
- you cannot expand the ideas (in class or in tutorial or through email)
• English (more next slide)
- People who did well are not the people with the best English
![Page 20: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/20.jpg)
Copyright 2007. Richard Tang. All rights reserved. 20Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Announcements
• English
- You have to start using English to learn this year
- Never use the dictionary to learn concepts in P2 Simple words new words; don’t translate the whole book
into Chinese Don’t worry and Richard will help you along the way
- For non-concept words, you may use the dictionary E.g. announcements, expand, facilitate, fundamental and so
on
![Page 21: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/21.jpg)
Copyright 2007. Richard Tang. All rights reserved. 21Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
![Page 22: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/22.jpg)
Copyright 2007. Richard Tang. All rights reserved. 22Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
• Scarcity and choice
- Rationality
- Opportunity cost
- Efficiency (allocative and technical)
• Production Possibility Curve/Frontier
• Opportunity cost vs. financial cost
![Page 23: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/23.jpg)
Copyright 2007. Richard Tang. All rights reserved. 23Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
Scarcity and choice
• If you have an unlimited amount of $$$, what would you buy?
- Tutorial assignment for this week
• But, unfortunately, you only have 2000 RMB… What do you do now?
- So, when the resource (this time is $$$ in hand) is scarce/limited , i.e. scarcity of resources…
- You need to make a choice (i.e. by giving up something else)!!
- The next best thing/choice/alternative you have given up is called opportunity cost
![Page 24: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/24.jpg)
Copyright 2007. Richard Tang. All rights reserved. 24Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
Scarcity and choice
Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)
• An assumption of how people (e.g. government, individuals, and companies) act
• In economics, rational behaviors can be
- Buying more (for individuals),
- Maximizing profits (for companies
- Improving the welfare of a country (for government)
![Page 25: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/25.jpg)
Copyright 2007. Richard Tang. All rights reserved. 25Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
Scarcity and choice
Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)
• The next best option given up
• E.g. when you are in class, you can spend time
- Sleeping
- Talking to your boyfriend or your girlfriend
- Work and make money
![Page 26: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/26.jpg)
Copyright 2007. Richard Tang. All rights reserved. 26Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
Scarcity and choice
Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)
• How to choose to meet different types of wants allocative efficiency
- E.g. Deciding the time spent on eating and studying…
• How to choose to meet one type of wants technical efficiency
- E.g. Deciding how to study (if you plan to spend 1.5 hours on a subject)
![Page 27: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/27.jpg)
Copyright 2007. Richard Tang. All rights reserved. 27Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
• Scarcity and choice
- Rationality
- Opportunity cost
- Efficiency (allocative and technical)
• Production Possibility Curve/Frontier
• Opportunity cost and financial cost
![Page 28: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/28.jpg)
Copyright 2007. Richard Tang. All rights reserved. 28Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
Production Possibility Curve/Frontier (PPC/PPF)
• By using all the concepts below:
- Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)
• We can use PPC/PFF to
- Show the possible combination of goods that can be produced
- Given a limited amount of resources
![Page 29: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/29.jpg)
Copyright 2007. Richard Tang. All rights reserved. 29Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Units of guns
Units of butter
Go
Bo
A
BG1
B1
•Assume a country can produce two types of goods with its resources – guns and butter
Gm
Bm•If the country is at point A on the PPF, it can produce the combination of Go guns and Bo butter.
•If it reallocates its resources (moving round the PPF from A to B) it can produce more butter, but only at the expense of fewer guns.
•The opportunity cost of producing an extra Bo – B1 butter is Go – G1 guns.
•If it devotes all resources to guns, it could produce a maximum of Gm.
•If it devotes all its resources to butter, it could produce a maximum of Bm.
Production Possibility Frontier
![Page 30: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/30.jpg)
Copyright 2007. Richard Tang. All rights reserved. 30Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Units of guns
Units of butter
Go
Bo
A
G1
B1
Production Possibility Frontier
•B
C
It CANNOT produce at points outside the PPF (such as point C), unless:
1. it finds a way of expanding its resources or
2. improves the productivity of those resources it already has.
• 1) and 2) will push the PPF outwards.
Inefficient use of resource
![Page 31: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/31.jpg)
Copyright 2007. Richard Tang. All rights reserved. 31Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
• Scarcity and choice
- Rationality
- Opportunity cost
- Efficiency (allocative and technical)
• Production Possibility Curve/Frontier
• Opportunity cost and financial cost
![Page 32: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/32.jpg)
Copyright 2007. Richard Tang. All rights reserved. 32Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts
Opportunity cost vs. financial cost
• Financial cost (a.k.a. accounting cost) may include:
- Cost incurred (such as wages)
- Cost recorded under accounting conventions (such as depreciation)
- Opportunity cost ignored E.g. the amount of money you can make when you are NOT
working here
• More nature of profit
![Page 33: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/33.jpg)
Copyright 2007. Richard Tang. All rights reserved. 33Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Fundamental concepts (recap)
• Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)
• Production possibility curve/frontier
• Opportunity cost vs. financial cost
![Page 34: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/34.jpg)
Copyright 2007. Richard Tang. All rights reserved. 34Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
![Page 35: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/35.jpg)
Copyright 2007. Richard Tang. All rights reserved. 35Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Central economic questions
As a society,
• Scarce resources (can’t produce everything) choose what to produce want to produce efficiently (technical efficiency): how to produc
e? people who need, and/or afford it, will get it (allocative efficienc
y): for whom to produce?
![Page 36: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/36.jpg)
Copyright 2007. Richard Tang. All rights reserved. 36Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Central economic questions
• What to produce?
- Food, weapons, technology, education, and etc..
• How to produce?
- A lot of people/machines/capital/land…
• For whom to produce?
- Who will get the goods and services produced?
- Every one has the same share? More for the rich (if things can be bought by $$$)? More for those who work hard?
- Income distribution: more next slide
![Page 37: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/37.jpg)
Copyright 2007. Richard Tang. All rights reserved. 37Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Central economic questions
• Income distribution
- Functional distribution of income The percentage distribution of income among the factors of
production (rent, wages, interests, and profits)
- Personal distribution of income The percentage distribution of income among individual
persons
• The poorest 20% earned only 5% of total income.
• The richest 20% earned 47% of total income.
![Page 38: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/38.jpg)
Copyright 2007. Richard Tang. All rights reserved. 38Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
![Page 39: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/39.jpg)
Copyright 2007. Richard Tang. All rights reserved. 39Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Economics as a social science
Just like a science, economics…• Positive (descriptive) statements
- not normative (value/judgment) statement• Laws
- Diminishing marginal returns (e.g. the more hamburgers you eat, the less satisfaction from each hamburger)
- Correct under most (normal) situations • Hypotheses
- Educated guess on how one variable can affect the total outcome, while others being equal (ceteris paribus)
- Verifiable by further investigation
![Page 40: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/40.jpg)
Copyright 2007. Richard Tang. All rights reserved. 40Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Economics as a social science
Unlike science, economics
• No control experiment can be done
- i.e. we cannot really keep all other things equal in the real world
- E.g. your performance today
![Page 41: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/41.jpg)
Copyright 2007. Richard Tang. All rights reserved. 41Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Economics as a social science (recap)
• Positive, not normative
• Laws
• Hypotheses
• No control experiment
![Page 42: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/42.jpg)
Copyright 2007. Richard Tang. All rights reserved. 42Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
![Page 43: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/43.jpg)
Copyright 2007. Richard Tang. All rights reserved. 43Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Methods of organizing an economy
• They are answers to three central economic questions
• The command economy
• The free market economy
• The mixed economy
![Page 44: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/44.jpg)
Copyright 2007. Richard Tang. All rights reserved. 44Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
The command economy
• The government/state decides:
- What to produce (based on her estimation)
- How to produce
- For whom to produce (distribution, i.e. who gets what)
• Prices fixed by the government
• E.g. food is cheap everybody can afford it
Lecture: Methods of organizing an economy
![Page 45: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/45.jpg)
Copyright 2007. Richard Tang. All rights reserved. 45Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
The command economy
• Advantages
- All resources employed (no waste…no unemployment)
- Basic needs will be met and weaker members can be cared for
• Disadvantages
- Lack of incentives
- Inefficient and inaccurate planning
- Black market
Lecture: Methods of organizing an economy
![Page 46: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/46.jpg)
Copyright 2007. Richard Tang. All rights reserved. 46Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
The free market economy
• What to produce?
- Determined by businesses’ perception of what the customers want through rise and fall of prices
• How to produce?
- Businesses produce at the lowest cost possible
• For whom?
- Determined by income and willingness to spend on certain goods
Lecture: Methods of organizing an economy
![Page 47: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/47.jpg)
Copyright 2007. Richard Tang. All rights reserved. 47Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
The free market economy
• Advantages
- Efficient
- Responsive
- Incentives for producer (technical efficiency)
- Freedom and incentives for people to make their economic choice
Lecture: Methods of organizing an economy
![Page 48: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/48.jpg)
Copyright 2007. Richard Tang. All rights reserved. 48Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
The free market economy
• Disadvantages
- Market inequalities
- No incentive to produce public goods such as national defense, public sanitation, etc.
- Too little supply of socially desirable goods (merit goods) to too few people (who can afford it)
Lecture: Methods of organizing an economy
![Page 49: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/49.jpg)
Copyright 2007. Richard Tang. All rights reserved. 49Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
The mixed economy
• It is the same as free market economy except
- The government will produce merit goods (e.g. health care and education) and public goods
- Uneconomic goods (no one would have produced it in a pure market economy), the government may subsidize
- Banning goods that are bad (e.g. drugs) or tax them heavily (such as cigarettes)
Lecture: Methods of organizing an economy
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Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Natural resources, labour, capital and enterprise
• Factors of production
• Remember words mean differently in different courses!!!!
• Natural resources/land (include all natural resources) rent
• Labor wages
• Capital (physical and monetary) interest
• Enterprise (the ability to manipulate the above three factors) profit
Lecture: Methods of organizing an economy
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Copyright 2007. Richard Tang. All rights reserved. 51Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
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Copyright 2007. Richard Tang. All rights reserved. 52Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Entrepreneurship
• Risk
- When the predicted demand is different from the actual
• Reward
- Profit, brand name
• Ownership and control
- An organization grows owner (shareholders) + manager
- When that happens, we can’t really call those owners and managers as entrepreneurs
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Copyright 2007. Richard Tang. All rights reserved. 53Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
![Page 54: Paper 2 Economics Lecture 01 And 2](https://reader034.vdocuments.us/reader034/viewer/2022051411/54795e9fb4795977098b475e/html5/thumbnails/54.jpg)
Copyright 2007. Richard Tang. All rights reserved. 54Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Nature of profit
Economic profit vs. accounting profit
• Economic profit: opportunity cost taken into consideration
• Accounting profit: opportunity cost NOT taken into consideration
• Normal profit
- Minimum profit to stay in a business,
- i.e. opportunity cost of the services of an entrepreneur + the potential reward
(interest) of the capital used + …other resources
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Copyright 2007. Richard Tang. All rights reserved. 55Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Nature of profit
Economic profit vs. accounting profit
Example 1 Example 2 Example 3
£'000 £'000 £'000
Annual sales 500 250 240
Annual costs 350 200 195
Annual accounting profit 150 50 45
Current salary 25 25 25
Interest on capital tied up 15 15 15
Rental value of premises used 4 4 4
Risk premium 6 6 6
50 50 50
Net economic (normal) profit/loss 100 0 -5
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Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: Nature of profit
• Supernormal profit
- Profit after normal profit
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Copyright 2007. Richard Tang. All rights reserved. 57Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline (recap)
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
Time to test yourself!
How far can you expand the concept when you look at this
outline?
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Copyright 2007. Richard Tang. All rights reserved. 58Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Lecture: outline (recap)
• Fundamental concepts
• Central economic questions
• Economics as a social science
• Methods of organising an economy
- Natural resources, labour, capital and enterprise
• Entrepreneurship
• The nature of profit
E.g. If we look at the first one…
Scarcity of resource and unlimited wants
Choose
Opportunity cost
Efficiency (allocative and technical)
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Copyright 2007. Richard Tang. All rights reserved. 59Sept 10, 2007
Operating info: 55,10 + 50,15 + 30,10 + 30 =200
Reading
• Review: you must
- What we have covered
• Preview
- The rest of the ppt
• Email Richard to get the ppt before this Sat 11pm
- You don’t use the textbook or the green book to study Unless you want to waste your time and then Fail!!
• See you in the tutorial!
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Paper 2: Economics
Lecture 1: Economic concepts