Paper 2: Economics Lecture 1: Economic concepts
Agenda <ul><li>Announcements </li></ul><ul><li>Lecture </li></ul><ul><li>Reading and preview </li></ul>
Announcements <ul><li>About me </li></ul><ul><li>Logistics </li></ul><ul><li>How people failed in the past </li></ul><ul><...
Announcements <ul><li>About me: Richard, not teacher </li></ul><ul><li>Education </li></ul><ul><ul><li>AICPA, MBA, BS in a...
Announcements <ul><li>About me: Richard, not teacher </li></ul><ul><li>Strengths (too many) </li></ul><ul><ul><li>Talking ...
Announcements <ul><li>About me: Richard, not teacher </li></ul><ul><li>More me </li></ul><ul><ul><li>Email: rtang_geely@ya...
Announcements <ul><li>About me </li></ul><ul><li>Logistics (flow of materials; here, it means preparation) </li></ul><ul><...
Announcements <ul><li>Logistics (flow of materials; here, it means preparation) </li></ul><ul><li>Syllabus (exam format) <...
Announcements <ul><li>Logistics: syllabus </li></ul><ul><li>Syllabus first, always the syllabus first! </li></ul><ul><ul><...
Click on this!!!
Announcements <ul><li>Logistics: syllabus    what we have to follow </li></ul><ul><li>Pay attention to the percentages </...
Announcements <ul><li>Logistics: schedule   </li></ul><ul><li>Do you have it?  </li></ul><ul><li>I guess not </li></ul>
Schedule
Announcements <ul><li>Logistics: schedule   </li></ul><ul><li>Tutorial </li></ul><ul><ul><li>You may have assignments (pre...
Announcements <ul><li>Logistics: materials </li></ul><ul><ul><li>PPTs    always PPTs first! </li></ul></ul><ul><ul><ul><l...
Announcements <ul><li>About me </li></ul><ul><li>Logistics </li></ul><ul><li>How people failed in the past </li></ul><ul><...
Announcements <ul><li>How people failed in the past </li></ul><ul><li>Didn’t believe me </li></ul><ul><ul><li>Memorizing t...
Announcements <ul><li>About me </li></ul><ul><li>Logistics </li></ul><ul><li>How people failed in the past </li></ul><ul><...
Announcements <ul><li>How to do well in P2 and P4 (and in anything) </li></ul><ul><li>Ideas    expand the ideas    use t...
Announcements <ul><li>English </li></ul><ul><ul><li>You have to start using English to learn this year </li></ul></ul><ul>...
Lecture: outline <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions  </li></ul><ul><li>Economics as...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><ul><li>Rationality </li></ul></ul><ul><ul><li>Opp...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><li>If you have an unlimited amount of $$$, what w...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><li>Scarce resource (assuming  rationality )   ch...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><li>Scarce resource (assuming rationality)   choo...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><li>Scarce resource (assuming rationality)   choo...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><ul><li>Rationality </li></ul></ul><ul><ul><li>Opp...
Lecture: Fundamental concepts <ul><li>Production Possibility Curve/Frontier (PPC/PPF) </li></ul><ul><li>By using all the c...
Production Possibility Frontier Units of guns Units of butter Go Bo A B G1 B1 <ul><li>Assume a country can produce two typ...
Production Possibility Frontier Units of guns Units of butter Go Bo A G1 B1 <ul><li>B </li></ul>C <ul><li>It CANNOT  produ...
Lecture: Fundamental concepts <ul><li>Scarcity and choice </li></ul><ul><ul><li>Rationality </li></ul></ul><ul><ul><li>Opp...
Lecture: Fundamental concepts <ul><li>Opportunity cost vs. financial cost </li></ul><ul><li>Financial cost (a.k.a. account...
Lecture: Fundamental concepts (recap) <ul><li>Scarce resource (assuming rationality)   choose (opportunity cost)     eff...
Lecture: outline <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions </li></ul><ul><li>Economics as ...
Lecture: Central economic questions <ul><li>As a society, </li></ul><ul><li>Scarce resources (can’t produce everything) </...
Lecture: Central economic questions <ul><li>What to produce? </li></ul><ul><ul><li>Food, weapons, technology, education, a...
Lecture: Central economic questions <ul><li>Income distribution </li></ul><ul><ul><li>Functional distribution of income  <...
Lecture: outline <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions </li></ul><ul><li>Economics as ...
Lecture: Economics as a social science <ul><li>Just like a science, economics… </li></ul><ul><li>Positive (descriptive) st...
Lecture: Economics as a social science <ul><li>Unlike science, economics </li></ul><ul><li>No control experiment can be do...
Lecture: Economics as a social science (recap) <ul><li>Positive, not normative </li></ul><ul><li>Laws </li></ul><ul><li>Hy...
Lecture: outline <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions  </li></ul><ul><li>Economics as...
Lecture: Methods of organizing an economy <ul><li>They are answers to three central economic questions </li></ul><ul><li>T...
<ul><li>The command economy </li></ul><ul><li>The government/state decides: </li></ul><ul><ul><li>What to produce (based o...
<ul><li>The command economy </li></ul><ul><li>Advantages </li></ul><ul><ul><li>All resources employed (no waste…no unemplo...
<ul><li>The free market economy </li></ul><ul><li>What to produce? </li></ul><ul><ul><li>Determined by businesses’ percept...
<ul><li>The free market economy </li></ul><ul><li>Advantages </li></ul><ul><ul><li>Efficient </li></ul></ul><ul><ul><li>Re...
<ul><li>The free market economy </li></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Market inequalities </li></ul></ul><...
<ul><li>The mixed economy </li></ul><ul><li>It is the same as free market economy except </li></ul><ul><ul><li>The governm...
<ul><li>Natural resources,  labour , capital and enterprise </li></ul><ul><li>Factors of production </li></ul><ul><li>Reme...
Lecture: outline <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions </li></ul><ul><li>Economics as ...
Lecture: Entrepreneurship <ul><li>Risk </li></ul><ul><ul><li>When the predicted demand is different from the actual </li><...
Lecture: outline <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions </li></ul><ul><li>Economics as ...
Lecture: Nature of profit <ul><li>Economic profit vs. accounting profit </li></ul><ul><li>Economic profit: opportunity cos...
Lecture: Nature of profit <ul><li>Economic profit vs. accounting profit </li></ul>-5 0 100 Net economic (normal) profit/lo...
Lecture: Nature of profit <ul><li>Supernormal profit </li></ul><ul><ul><li>Profit after normal profit </li></ul></ul>
Lecture: outline (recap) <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions </li></ul><ul><li>Econo...
Lecture: outline (recap) <ul><li>Fundamental concepts </li></ul><ul><li>Central economic questions </li></ul><ul><li>Econo...
Reading <ul><li>Review: you must </li></ul><ul><ul><li>What we have covered </li></ul></ul><ul><li>Preview </li></ul><ul><...
Paper 2: Economics Lecture 1: Economic concepts
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  • Paper 2 Economics Lecture 01 And 2

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