2. • Scarcity, choice (opportunity cost) and
resource allocation – Hence the BASIC
ECONOMIC problem
• Factors of Production
• Production possibility curves – shapes and shifts
• Decision making at the margin
• Specialization and exchange
• Division of labour
• Different allocative mechanisms – Planned,
Market & free and Problems of transition
• Ceteris Paribus, Positive and normative
statements
• Money: functions and characteristics
8. • Hence scarcity forces us to make
choice
• And so Allocation of Resources
9. Decision on allocation of
resources, Leads to 3 major
economic problem/
questions:
•What to produce
•How to produce
•Whom to produce
10. • WHAT TO PRODUCE
• Food or Clothes
• Cars or hospitals
• ipods or Cosmetics or military strength
Basic Economic Problem- 3 decisions
11. techniques used.
least cost method of production
labour intensive or capital intensive
Basic Economic Problem- 3 decisions
HOW TO PRODUCE
12. Will everyone get an equal share
of what is produced ?
Would the income be distributed
equally?
Basic Economic Problem- 3 decisions
for WHOM TO PRODUCE
13. • Production: Creating goods and
services
• Consumption: Using the goods
and services to satisfy want
20. Specialization
• Firms or Individuals or Regions
or Countries producing some
goods and services which they
are best producing at
21. Exchange
• No economy can be self dependent
but they have to be interdependent
• Trade and exchange of goods and
services helps to resolve the problem
of scarcity to a certain extent
22. Division of labour
• Adam Smith – division of labour
represents a qualitative increase in
productivity
23. Production Possibility Curve (PPC)
• Every decision has an opportunity
cost – the cost in foregone
opportunities.
• The production possibilities curve
shows the trade-offs among choices
we make.
• A production possibility curve is used
to illustrate opportunity cost.
25. Eg 1
Going to Hong Kong Disneyland
• Ticket : Free of charge
• Money spent on food, transport =$200
• Income forgone = $500
• Full cost of going for Disneyland (HK) =$700
26. Eg 2
• Option 1 going to a 1 hour concert and pays $200
for a ticket
• Option 2 working in Park’n as a salesman earning
$30 per hour
• Option 3 working as a tutor earning $100 per hour
• Full cost of attending the concert = price of ticket +
income forgone (highest-valued option forgone)
• Full cost of attending the concert = $200 + $100 =
$300
27. Sli
de
A = 24 lbs of coffee
B = 16 lbs of cofee & 4 units of computers
C = 8 lbs of cofee and 8 Computers
D = 12 units of Computer
Coffee
(lb/day)
Computers
(unit/day)
A
B
C
D
24
0
16
8
4 8 12
Cost of
4 computers= ?
Another 4 Computers= ?
Another 4 Computers = ?
Hence Opportunity cost is
same
28. In our choices of production,
the opportunity cost may
Remain Constant
Increase
Decrease
29. Depending on our choices of
Production,
the opportunity cost may
Remain Constant
Increase
Decrease
30. Unit 1 : Macroeconomics
National Council on Economic
Education
Constant O.C Decreasing O.C
Increasing O.C
31. PPC is also called:
• Production Possibility Frontier (PPF)
– What you can and cannot produce
• Product Transformation Curve
–What will it cost you to produce the other
good
–When you produce something else, you have to
reallocate resources – “Reallocation of
Resources”
–How easily you can reallocate – Factor Mobility
32. A Typical PPF & PTC ………….
Unattainable
Inefficient
Opportunity
cost of is
increasing…
37. • Consumer Goods
Products purchased by consumers
for personal or household use.
• Capital Goods
Producers’ goods or means of
production (Eg: Machines)
Creating Captial goods Investment
38. • More Consumer goods Higher standard of
living
• But if we do not have sufficient capital goods
to produce consumer goods In the future
Standard of living may fall
• So a decision has to be made:
“Whether to produce Consumer Goods or
Capital Goods?”
40. • If Capital goods are less than K
Economics Decline
• If we produce more capital goods
In the future Economic Growth
41. • Developing Countries
–They have to increase their capital
goods so more resources are
allocated capital goods Low
standard of living.
–A minimum amount of resources
allocated for comsumer goods
survival of population
–“Subsistence Level of Consumption”
42. • In under-developed countries or
poorly developing countries………
–Most of resources are allocated for
consumer goods for survival of
population
43. Economic structure
• The Various Sectors in an Economy
• Primary sector - agriculture, fishing and mining &
oil extraction
• Secondary sector– All Manufacturing activities.
Eg: Food processing, textiles and clothing, iron
and steel production, vehicle manufacturing and
electronics.
• Tertiary sector – service sector. Eg: retailing,
transport, financial services, education, call
centre services & information technology.
44. Economic System
• Economic system is used to describe the means
or allocative mechanism by which its people,
businesses and government make choices
–The (free) market economy
–The command/planned economy
–Mixed economy
45. The Characteristics of Market Economy
• Freedom to buy what they want and sell what they make.
• Private property
• Changes in supply and demand control the prices (and hence
what is made and sold) Adam Smith-invisible hand (the price
system)
• Self-interest
• Little government interference (control national defence, act
against monopolies, issue money, raise taxes and protect the
rights of the private sector)
• Market economy is an ideal which does not exist in today’s
economy.
46. Strengths ofStrengths of (Free) Market Economy(Free) Market Economy
• Freedom exists for everyone involvedFreedom exists for everyone involved
• Relatively small degree of governmentalRelatively small degree of governmental
influenceinfluence
• Variety of goods and services are producedVariety of goods and services are produced
• High degree of consumer satisfactionHigh degree of consumer satisfaction
47. Weaknesses of (Free) Market EconomyWeaknesses of (Free) Market Economy
• The primary weakness is deciding for whom toThe primary weakness is deciding for whom to
produceproduce
• The young, sick and old would have difficultyThe young, sick and old would have difficulty
in a free market environmentin a free market environment
• Markets sometimes fails (some goods areMarkets sometimes fails (some goods are
overproduction and underproduction or failoverproduction and underproduction or fail
production)production)
48. TheThe Characteristics of Command (planned)Command (planned)
EconomyEconomy
• The government makes all the key decisions and hasThe government makes all the key decisions and has
complete control over all the resources of the country:complete control over all the resources of the country:
• Public ownership of all propertyPublic ownership of all property
• Centrally planned productionCentrally planned production
• government dictates pricesgovernment dictates prices
• Profit is not a factorProfit is not a factor –– the government produces what itthe government produces what it
feels is in the national interestfeels is in the national interest
49. TheThe Characteristics of Mixed EconomyMixed Economy
• The government makes some general policyThe government makes some general policy
decisionsdecisions
• Mostly private but some public ownership ofMostly private but some public ownership of
property. Govt also produces Merit Goods.property. Govt also produces Merit Goods.
• In private industry profit is the driverIn private industry profit is the driver
• Government intervention to solve theGovernment intervention to solve the
problem caused by market failure.problem caused by market failure.
50. Problems of transition when central
planning in an economy is reduced
• Law and order
• Merit goods
• Public goods
• Quality and standards
• Inflation
51. Positive economics/statement
• Positive statement is about “ what the
world is.” Has a logic or reason…….
• May be wrong!!
• For example:
• Inflation will increases the prices
52. Normative economics/statement
• “Is what you think the world should be”.
• Involves your judgment or opinions, personal
views, political beliefs and ethics
• For example:
• The government ought to introduce a ban on
smoking in public places.
53. Money
• A simple definition is that money is
anything that is regularly used to buy goods
and services.
• Normally, this is coins and notes but the
definition also includes cheques, debit cards
and credit cards. Oil/ Platinum/Gold
54. Barter
• The direct exchange of one good or
service for another in this way is
known as Barter.
55. Coincidence of wants
• For Barter to happen, both parties in a
transaction must have goods/ services
that each other wants….. coincidence of
wants
• So money is “one such commodity” that
everyone would be willing to accept in
exchange for all other goods and services.
56. The functions of money
• a medium of exchange
• a unit of account
• a standard for deferred payment
• a store of wealth
58. Unit of account
–The ‘account’ aspect allows
the sum of money to be
recorded and for different
values to be added or
compared.
–it measures the value of a
good and allows you to
compare the value of one
good to another good
59. 59
Standard of Deferred Payment
–Not all payments we make are
immediate.
–Payments can be made in the future
once terms have been agreed
between the parties involved.
I shouldn’t have
told him I can’t
pay him back.
60. Store of Wealth
–Money can be
held or ‘stored’
for a period of
time, usually
with a bank or
other financial
institution,
before it is used.
61. The characteristics of money
• Acceptability
• Durability
• Portability
• Divisibility
• Scarcity
62. Ceteris paribus
• This Latin phrase translates to –
“with other things the same” or
“all other things being equal or held constant.”
• If the price of beef increases —ceteris
paribus—the quantity of beef demanded
by buyers will decrease.
63. Intrinsic Value of Coins and Notes
• Intrinsic Value - The market value of the
constituent metal within a coin/ paper of a
currency.
• Intrinsic Value of Coins and Notes is very less
or No Value at all…..
