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1 introduction to economics

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  • 1. Introduction to EconomicsEconomics – the study of how individuals and societies make decisions about ways to use scarceresources to fulfill wants and needs.Economic QuestionsSociety (we) must figure out,  WHAT to produce (make)  HOW MUCH to produce (quantity)  HOW to produce it (manufacture)  FOR WHOM to Produce (who gets what)  WHO gets to make these decisions?Resources - The things used to make other goods.Scarcity (The problem): unlimited wants and needs but limited resourcesBecause ALL resources, goods, and services are limited – we must make choices!Microeconomics MacroeconomicsBehaviors of individual economic units like Analyzes how the entire national economyconsumers, producers, landowners, families, etc. performs. It analyzes unemployment, inflation,How and why do they make the decisions they price levels, interest rates (many things we take asmake? given in microeconomics).Industrial EconomicsIndustrial Economics is the study of firms, industries markets and their relationship with societyWhen analyzing decision making at the levels of the individual firm and industry, Industrial Economicshelps us understand such issues as,  the levels at which capacity, output and prices are set;  the extent that products are differentiated from each other;  how much firms invest in research and development (R&D)  how and why firms advertiseOpportunity Cost = the Value of the Next Best ChoiceFull note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
  • 2. Four Factors of Production 1. LAND – Natural Resources  Water, natural gas, oil, trees (all the stuff we find on, in, and under the land) 2. LABOR – Physical and Intellectual  Labor is manpower 3. CAPITAL - Tools, Machinery, Factories  The things we use to make things  Human capital is brainpower, ideas, innovation 4. ENTREPRENEURSHIP – Investment $$$  Investing time, natural resources, labor and capital are all risks associated with productionTHREE parts to the Production Process 1. Factors of Production – what we need to make goods and services 2. Producer – company that makes goods and/or delivers services 3. Consumer – people who buy goods and servicesProduction ProcessFull note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
  • 3. Capital Goods and Consumer Goods  Capital Goods: are used to make other goods  Consumer Goods: final products that are purchased directly by the consumerChanges in production  Division of Labor – different people perform different jobs to achieve greater efficiency (assembly line).  Consumption – how much we buy (Consumer Sovereignty)Conditions that make economic models validCeteris paribus assumption (Ceteris paribus means all else held constant. If you do not hold all otherfactors constant then you cannot determine what affected the change.)Association vs. causation - The fact that one event follows another does not necessarily mean that thefirst event caused the second eventWhat makes economic predictions to be contradictory and corrective actions to be ineffective?  Economic issues are controversial (complex and several indicator)  Time delay – information lag, policy determination, policy effectiveness lag  Positive economics – “If…then” – economists may disagree about the occurrence of the first event  Normative economics – predictions based on values, preconceptionsComparative EconomicsCommand Economies  Def: Economic questions answered by the government  Very little economic choice  No private ownership  Communism  Old Soviet Union, old Communist China, Cuba and North KoreaCommunism  Government should control economy and distribute goods and services to the people  Karl Marx - Founder of revolutionary socialism and communismFull note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
  • 4. Free Market (Capitalist) Economies  Economic questions answered by producers and consumers  Limited government involvement  Private property rights  Wide variety of choices and productsAdam Smith - Explained the workings of the free market within capitalist economiesGovernment stays out of business practices “hands off” to let the market place determine production,consumption and distribution. Individual freedom and choice emphasized.Principles of Capitalism  Competition – more businesses means lower prices and higher quality products for consumers to buy.  Voluntary Exchange – businesses and consumers MUST be free to buy or sell what and when they want.  Private Property – Individuals and businesses MUST be able to get the benefits of owning their OWN property. Government does not control it.  Consumer Sovereignty – consumers get to make free choices about what to buy and this helps drive production (Demand drives Supply).  Profit Motive – people want to make or save $$$$. Their “Self Interest” motivates Capitalism  Social Safety Net – “Mixed Economy” idea that says the government should NOT allow people to suffer in economic crisis (natural part of Capitalism’s “Business Cycle”), but provide security instead – Social Security, Unemployment Insurance, etc.Mixed Economy/Socialism  Government involvement and ownership and control of property, of decision making, and companies.  Government control of business  Social “safety net” for people  Socialism  Common in Europe, Latin America, and AfricaJohn Maynard Keynes - Government should intervene in economic emergencies through tax andspending (Fiscal Policy) and changing the money supply (Monetary Policy). This is done to smooth outthe business cycle (expansion and recession) and keep inflation low.Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html
  • 5. When Production Decreases  Downsizing – Lying off employees to save costs.  Outsourcing – sending jobs and manufacturing overseas or contracting to outside companies to save money.  Bankruptcy – government allows business to restructure its debt, but now all profits go to paying off debt rather than to the owners/investors.  Out of Business – lose all your business, money, and profits.How does ‘Labor’ protect itself?Labor Unions: organization of workers who have banded together to achieve common goals  Wage protection  Workplace safety  Benefits  Job protectionCollective Bargaining - Representatives of the Union and the company negotiate a contract for theworkers; usually they rely on compromiseStrikes - When an agreement cannot be reached, workers stop working to try to force the hand of thecompanyFull note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my-business-economics-and-financial.html