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Gsb728 lecture note topic 1

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  • 1. Economics for Management GSB728 Topic 1: Alternative Value Systems and Basic Concepts in Economics 1
  • 2. Note: This lecture note was prepared based on the teaching material provided by the publisher of the textbook Principles of Economics. 2
  • 3. Learning Objectives 1. Value Systems. 2. The economic problem: What is economics all about? 3. What is meant by ‘macroeconomics’ and ‘microeconomics’? 4. Modelling economic relationships: How can diagrams be used to illustrate economic issues? 3
  • 4. Value Systems • How do we value things? – Individuals place different values on goods, services and assets depending on their personal preferences and circumstances. – Societies need a system for valuing things. – Different Value Systems include: • Traditional Value Systems (prices set by monarchs). • Labour Value Systems (prices set by gov. based on L). • Scarcity or Market Value Systems. 4
  • 5. The Economic Problem • What is economics all about? – Production and consumption: Satisfying human needs with available resources. – Scarcity is the central economic problem: Potentially unlimited human needs and limited resources. – Demand and supply: Help solve scarcity by reconciling resources and needs. 5
  • 6. What is Macroeconomics? • Macroeconomics is the branch of economics that studies economic aggregates (grand totals). – Examples: the overall level of prices, output and employment in the economy. • Macroeconomic issues: - Managing demand and supply aggregates. - Encouraging national economic growth. - Minimising inflation. - Managing the balance of trade. - Managing cyclical economic fluctuations. - Minimising unemployment. 6
  • 7. What is Microeconomics? • Microeconomics is the branch of economics that studies individual units (e.g.: households, firms and industries). • Microeconomic issues: – The choices to be made: • What to produce? • How to produce? • For whom to produce? – Recognise the Opportunity Cost (cost of any activity measured in terms of the best alternative forgone). – Making Rational Decisions (Benefits vs. Opportunity Costs). – Marginal Benefits vs. Marginal Costs (of doing an extra unit). – The social implications of choice (consequences). 7
  • 8. Modelling Economic Relationships: Production Possibility Curve • Diagrams: – Represent ‘models’ in economics. – Illustrate basic economic relationships. – Simplify and explain economic issues. • Production possibility curve (PPC): - A fundamental economic ‘model’. - Illustrates society’s production choices. 8
  • 9. Production Possibility Curve Derivation of a Production Possibility Curve 9
  • 10. A Production Possibility Curve 8 Units of food (millions) 7 6 Units of food Units of clothing (millions) (millions) 5 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 4 3 2 1 0.0 2.2 4.0 5.0 5.6 6.0 6.4 6.7 7.0 0 0 1 Source: Sloman et al. (2014). 2 3 4 5 Units of clothing (millions) 6 7 8 10
  • 11. A Production Possibility Curve (contd.) a 8 Units of food (millions) 7 6 5 Units of food Units of clothing (millions) (millions) 4 a 3 2 1 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 0.0 2.2 4.0 5.0 5.6 6.0 6.4 6.7 7.0 0 0 1 Source: Sloman et al. (2014). 2 3 4 5 Units of clothing (millions) 6 7 8 11
  • 12. A Production Possibility Curve (contd.) 8 b Units of food (millions) 7 6 Units of food Units of clothing (millions) (millions) 5 4 b 3 2 1 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 0.0 2.2 4.0 5.0 5.6 6.0 6.4 6.7 7.0 0 0 1 Source: Sloman et al. (2014). 2 3 4 5 Units of clothing (millions) 6 7 8 12
  • 13. A Production Possibility Curve (contd.) 8 Units of food (millions) 7 c 6 Units of food Units of clothing (millions) (millions) 5 4 c 3 2 1 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 0.0 2.2 4.0 5.0 5.6 6.0 6.4 6.7 7.0 0 0 1 Source: Sloman et al. (2014). 2 3 4 5 Units of clothing (millions) 6 7 8 13
  • 14. A Production Possibility Curve [Figure 1.1] w 8 Units of food (millions) 7 x 6 (Impossible) (Efficient) 5 4 3 2 1 0 0 1 Source: Sloman et al. (2014). 2 3 4 5 Units of clothing (millions) 6 7 8 14
  • 15. Modelling Economic Relationships • Economists use diagrams and equations as tools to illustrate economic issues. • These tools are called ‘models’. • The production possibility curve (PPC) is a specific economic model. • The PPC shows all possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed. 15
  • 16. Modelling Economic Relationships (contd.) • We can use diagrams to illustrate economic issues!! – Microeconomics and the PPC: • Choice creates opportunity cost. • Opportunity cost increases. – Macroeconomics and the PPC: • Production within the curve. • Shifts in the curve 16
  • 17. Production Possibility Curve Opportunity Cost and the PPC 17
  • 18. Increasing Opportunity Costs [Figure 1.2] 8 Units of food (millions) 7 6 x 1 5 1 y 1 2 4 3 Z 1 2 3 1 0 0 1 Source: Sloman et al. (2014). 2 3 4 5 6 Units of clothing (millions) 7 8 18
  • 19. Production Possibility Curve Resource Use and the PPC 19
  • 20. Food Making a Fuller Use of Resources [Figure 1.2] (Efficient) X Y (Efficient) (Inefficient) V Production inside the production possibility curve O Source: Sloman et al. (2014). Clothing 20
  • 21. Production Possibility Curve Shifts in the PPC 21
  • 22. Food Growth in Actual Output O Source: Sloman et al. (2014). Clothing 22
  • 23. Food Growth in Actual Output (contd.) x1 x O Source: Sloman et al. (2014). Clothing 23
  • 24. [Figure 1.4] Food Growth in Potential Output O Source: Sloman et al. (2014). Clothing 24
  • 25. Growth in Potential Output [Figure 1.4] (contd.) Food 5 years time x1 x Now O Source: Sloman et al. (2014). Clothing 25
  • 26. Modelling Economic Relationships: Circular Flow of Goods and Income • The circular flow of goods and incomes: – Firms and households. • Money flows from households to firms while goods and services flow from firms to households. • In addition, firms pay money to households to use factors of production owned by households (labour, land and capital). – What is a market? • Interaction between buyers and sellers (could be on street market, shop, internet, etc.) – Goods markets: • Real flows: goods and services 26
  • 27. Circular Flow of Goods and Incomes - I Goods & services Source: Sloman et al. (2014). 27
  • 28. Circular Flow of Goods and Incomes (contd.) • The circular flow of goods and incomes: – Firms and households – What is a market? – Goods markets: • Real flows: goods and services • Money flows: consumer expenditure 28
  • 29. Circular Flow of Goods and Incomes - II Goods & services $ Consumer expenditure Source: Sloman et al. (2014). 29
  • 30. Circular Flow of Goods and Incomes (contd.) • The circular flow of goods and incomes: – Firms and households. – What is a market? – Goods markets: • Real flows: goods and services. • Money flows: consumer expenditure. – Factor markets: • Real flows: services of labour and other factors. 30
  • 31. Circular Flow of Goods and Incomes - III Goods & services $ Consumer expenditure The services of the factors of production Source: Sloman et al. (2014). 31
  • 32. Circular Flow of Goods and Incomes (contd.) • The circular flow of goods and incomes: – Firms and households. – What is a market? – Goods markets: • Real flows: goods and services. • Money flows: consumer expenditure. – Factor markets: • Real flows: services of labour and other factors • Money flows: wages and other incomes. 32
  • 33. Circular Flow of Goods and Incomes – IV [ Figure 1.5] Goods and services $ Consumer expenditure Wages, rent, dividends, and so on $ Source: Sloman et al. (2014). The services of the factors of production 33
  • 34. Circular Flow of Goods and Incomes (contd.) • The circular flow of goods and incomes: – Macroeconomic issues: • The size of total flows. – Microeconomic issues: • Individual markets. • Composition of the circular flow: Choices made in markets of goods and factors (specific goods and factors traded). 34
  • 35. References Morales, L. E., Simons, P. and Valle de Souza, S. (2014). GSB728: Economics for Management [Topic Notes]. Armidale, Australia: University of New England, Graduate School of Business. Sloman, J., Norris, K and Garratt, D. (2014). Principles of Economics (4th ed.). French Forest, Australia: Pearson. 35

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