Basic economics ppt

MODULE OUTCOMES
Introduction to Economics
Supply and demand
Short term versus long term
Markets in action
Microeconomics & macroeconomics
Macroeconomics theory
Economic growth & development
Labour market
Examination

 When wants exceed the resources available to satisfy
them, there is scarcity.
The condition that arises because the available
resources are insufficient to satisfy wants.
 Faced with scarcity, people must make choices.
 Choosing more of one thing means having less of
something else.
The opportunity cost of any action is the best alternative
forgone.
THE ECONOMIC PROBLEM OF
SCARCITY, CHOICE & OPP COST

WHAT IS ECONOMICS?
● Economics
Here are some examples of scarcity and the trade-offs associated with
making choices:
• You have a limited amount of time. If you take a part-time job, each
hour on the job means one less hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land
for a park, it has one less acre for housing, retailers, or industry.
• You have limited income this year. If you spend R70 on a music CD,
that’s R70 less you have to spend on other products or to save.
The social science that studies the choices that we make
as we cope with scarcity and the incentives that influence
and reconcile our choices.

MICRO VS MACRO
Microeconomics
Microeconomics: The study of the choices that
individuals and businesses make, the way these
choices interact, and the influence that
governments exert on these choices.
Macroeconomics
Macroeconomics: The study of the aggregate (or
total) effects on the national economy and the
global economy of the choices that individuals,
businesses, and governments make.

WHAT IS ECONOMICS?
The Three Key Economic Questions: What, How,
and Who?
The choices made by individuals, firms, and
governments answer three questions:
1 What products do we produce?
2 How do we produce the products?
3 Who consumes the products?

PLANNED, MARKET &
MIXED ECONOMIES
Planned economy – the government decides how
resources are allocated to the production of particular
goods.
Market economy - the government plays no role in
allocating resources.
Mixed economies – the government and the private
sector jointly solve economic problems

WHY ECONOMICS IS
WORTH STUDYING
Understanding
Economic ideas are all around you. You cannot ignore
them. As you progress with you study of economics,
you’ll gain a deeper understanding of what is going on
around you.
Expanded Career Opportunities
Knowledge of economics is vital in many fields such as
banking, finance, business, management, insurance, real
estate, law, government, journalism, health care and the
arts.

PRODUCTION POSSIBILITIES
The PPF is a valuable tool for illustrating the
effects of scarcity and its consequences.
Production Possibilities Frontier
 The boundary between the combinations of
goods and services that can be produced and the
combinations that cannot be produced, given
the available factors of production and the state
of technology.

Figure 1 shows the
PPF for bottled water
and CDs.
Each point on the graph
represents a column of
the table.
The line through the
points is the PPF.

 The PPF puts three features of production
possibilities in sharp focus:
 Attainable and unattainable combinations
 Full employment and unemployment
 PPF are faced with opportunity costs
 Opportunity cost is the cost of the next best
alternative sacrificed when a choice is made

OPPORTUNITY COST
Moving from C to B, the 1 CD costs 1/2 of a bottle of water.

EXPANDING PRODUCTION POSSIBILITIES
 A sustained expansion of production possibilities is
called economic growth.
 The key factors that influence economic growth are:
 Technological change
 Expansion of human capital
 Capital accumulation
 Technological change is the development of new goods and
services and better methods of production.
 Expansion of human capital comes from education and on-the-
job training.
 Capital accumulation is the increase in capital resources.

THE PRINCIPLE OF OPPORTUNITY COST
► FIGURE 2.2
Shifting the Production
Possibilities Curve
An increase in the quantity of
resources or technological
innovation in an economy
shifts the production
possibilities curve outward.
Starting from point f, a nation
could produce more steel
(point g), more wheat (point h),
or more of both goods (points
between g and h).

DEMAND
The relationship between the quantity
demanded and the price of a good when all
other influences on buying plans remain the
same.
Illustrate a table with a price and quantity
demanded.

LAW OF DEMAND
The Law of Demand
Other things remaining the same,
 If the price of a good rises, the quantity demanded of
that good decreases.
 If the price of a good falls, the quantity demanded of
that good increases.
Demand curve versus demand schedule

DEMAND
Changes in Demand
 Change in the quantity demanded
 A change in the quantity of a good that people
plan to buy that results from a change in the
price of the good.
 Change in demand
 A change in the quantity that people plan to buy
when any influence other than the price of the
good changes.

DEMAND
The main influences on buying plans that change demand are:
 Prices of complementary/substitute goods
 Consumer Income (normal goods e.g. laptop & inferior
goods e.g. Sasco bread)
 Price Expectations
 Number of buyers –the greater the no. of buyers in a mkt,
the larger the dd for any good
 Tastes & Preferences – when prefs change, the demand
for items increases & dd for another item decreases

SUPPLY
Quantity supplied
The amount of a good, service, or resource that people are
willing and able to sell during a specified period at a specified
price.
The Law of Supply
Other things remaining the same,
 If the price of a good rises, the quantity supplied of
that good increases.
 If the price of a good falls, the quantity supplied of that
good decreases.

SUPPLY
Changes in Supply
 Change in quantity supplied
 A change in the quantity of a good that suppliers
plan to sell that results from a change in the price
of the good.
 Change in supply
 A change in the quantity that suppliers plan to
sell when any influence on selling plans other
than the price of the good changes.

2. When supply increases,
the supply curve shifts
rightward from S0 to S2.
1. When supply decreases,
the supply curve shifts
leftward from S0 to S1.
Figure 4.7 shows
changes in supply.
SUPPLY

SUPPLY
The main influences on selling plans that change supply are:
 Prices of related goods
 Prices of resources and other Inputs
 Expectations
 Number of sellers
 Productivity

Elasticity: A Measure
of Responsiveness
Microeconomics:Principles,Applications,andToolsO’Sullivan,Sheffrin,Perez6/e.

THE PRICE ELASTICITY OF DEMAND
● price elasticity of demand (Ed)
A measure of the responsiveness of the quantity
demanded to changes in price; equal to the absolute
value of the percentage change in quantity demanded
divided by the percentage change in price.
● Elasticity
Elastic > 1
Inelastic < 1
Unitary = 1

Price Elasticity and the Demand Curve
● perfectly inelastic demand
The price elasticity of demand is zero.
FIGURE 5.1 (cont’d.)
Elasticity and Demand Curves

Price Elasticity and the Demand Curve
● perfectly elastic demand
The price elasticity of demand is infinite.
FIGURE 5.1 (cont’d.)
Elasticity and Demand Curves

Computing Percentage Changes and Elasticities

Other Determinants of the Price Elasticity of Demand

The Short Run: Fixed Plant
The short run is a time frame in which the quantities
of some resources are fixed.
In the short run, a firm can usually change the quantity
of labor it uses but not the quantity of capital
The Long Run: Variable Plant
The long run is a time frame in which the quantities of
all resources can be changed.
A sunk cost is irrelevant to the firm’s decisions.
SHORT RUN vs LONG RUN

SHORT-RUN PRODUCTION
 To increase output with a fixed plant, a firm
must increase the quantity of labor it uses.
 We describe the relationship between output
and the quantity of labor by using three related
concepts:
 Total product (total quantity produced)
 Marginal product
 Average product

Total Product
 Total product (TP) is the total quantity of a
good produced in a given period.
 Total product is an output rate—the number of
units produced per unit of time.
 Total product increases as the quantity of labor
employed increases.

Figure 9.2 shows the total
product and the total
product curve.
Points A through H on the
curve correspond
to the columns of the
table.
The TP curve is like the
PPF: It separates
attainable points and
unattainable points.

Marginal Product
 Marginal product is the change in total product
that results from a one-unit increase in the
quantity of labor employed.
 It tells us the contribution to total product of
adding one more worker.
 When the quantity of labor increases by more (or
less) than one worker, calculate marginal product
as:
Marginal
product
Change in
total product
Change in
quantity of labor=

The table calculates
marginal product
and the orange bars in
part (b) illustrate it.
Notice that the steeper
the slope of the TP
curve, the greater is
marginal product.

The total product and
marginal product curves in
this figure incorporate a
feature of all production
processes:
• Increasing marginal
returns initially
• Decreasing marginal
returns eventually
• Negative marginal
returns

 Increasing Marginal Returns
 Increasing marginal returns occur when the
marginal product of an additional worker
exceeds the marginal product of the previous
worker.
 Increasing marginal returns occur when a small
number of workers are employed and arise
from increased specialization and division of
labor in the production process.

 Decreasing Marginal Returns
 Decreasing marginal returns occur when the
marginal product of an additional worker is less
than the marginal product of the previous
worker.
 Decreasing marginal returns arise from the fact
that more and more workers use the same
equipment and work space.
 As more workers are employed, there is less
and less that is productive for the additional
worker to do.

 Decreasing marginal returns are so pervasive that
they qualify for the status of a law:
 The law of decreasing returns states that:
As a firm uses more of a variable input,
with a given quantity of fixed inputs, the
marginal product of the variable input
eventually decreases.

Average Product
Average product is the total product per worker
employed.
It is calculated as:
Average product = Total product Quantity of
labor
Another name for average product is
productivity.

When marginal product is less than
average product, average product is
decreasing.
When marginal product equals
average product, average product is
at its maximum.

9.3 SHORT-RUN COST
 To produce more output in the short run, a firm
employs more labor, which means it must
increase its costs.
 We describe the relationship between output
and cost using three cost concepts:
 Total cost
 Marginal cost
 Average cost

9.3 SHORT-RUN COST
Total Cost
 A firm’s total cost (TC) is the cost of all the
factors of production the firm uses.
 Total cost divides into two parts:
 Total fixed cost (TFC) is the cost of a firm’s
fixed factors of production used by a firm—the
cost of land, capital, and entrepreneurship.
 Total fixed cost doesn’t change as output
changes.

9.3 SHORT-RUN COST
 Total variable cost (TVC) is the cost of the variable
factor of production used by a firm—the cost of
labor.
 To change its output in the short run, a firm must
change the quantity of labor it employs, so total
variable cost changes as output changes.
 Total cost is the sum of total fixed cost and total
variable cost. That is,
 TC = TFC + TVC
 Table 9.2 on the next slide shows Sam’s Smoothies’
costs.

SHORT-RUN COST
Figure 9.6 shows Sam’s
Smoothies’ total cost curves.
Total fixed cost (TFC) is
constant—it graphs as a
horizontal line.
Total cost (TC) also increases
as output increases.
Total variable cost (TVC)
increases as output increases.

SHORT-RUN COST
The vertical distance between
the total cost curve and the
total variable cost curve is
total fixed cost, as illustrated
by the two arrows.

SHORT-RUN COST
Marginal cost
 A firm’s marginal cost is the change in total
cost that results from a one-unit increase in total
product.
 Marginal cost tells us how total cost changes as
total product changes.
 Table 9.3 on the next slide calculates marginal
cost for Sam’s Smoothies.

SHORT-RUN COST
Average Cost
 There are three average cost concepts:
 Average fixed cost (AFC) is total fixed cost per
unit of output.
 Average variable cost (AVC) is total variable
cost per unit of output.
 Average total cost (ATC) is total cost per unit of
output.

SHORT-RUN COST
 The average cost concepts are calculated from the
total cost concepts as follows:
TC = TFC + TVC
 Divide each total cost term by the quantity produced,
Q, to give
ATC = AFC + AVC
Q Q Q
TC = TFC + TVC
or,

SHORT-RUN COST
The marginal cost curve (MC) is
U-shaped and intersects the
average variable cost curve and the
average total cost curve at their
minimum points.
The vertical distance between
these two curves is equal to
average fixed cost, as illustrated by
the two arrows.

Plant Size and Cost
 When a firm changes its plant size, its cost of
producing a given output changes.
 Each of these three outcomes arise because when a
firm changes the size of its plant, it might
experience:
 Economies of scale
 Diseconomies of scale
 Constant returns to scale
LONG-RUN COST

PRODUCTION AND COST IN
THE LONG RUN
Economies of Scale, Diseconomies of scale and constant returns
● economies of scale
A situation in which the long-run average cost of production decreases as
output increases.
● diseconomies of scale
A situation in which the long-run average cost of production increases as
output increases.
● Constant return s to scale
Exist when a firm increases plant size and labour employed by the same
percentage, its output increases by the same percentage and average total cost
remains constant

The Long-Run Average Cost Curve
 The long-run average cost curve shows the
lowest average cost at which it is possible to
produce each output when the firm has had
sufficient time to change both its plant size and
labor employed.
9.4 LONG-RUN COST

LONG-RUN COST
The long-run
average cost curve,
LRAC, traces the
lowest attainable
average total cost of
producing each
output.
In the long run, Samantha can vary both capital and labor
inputs.

12.4 LONG-RUN COST
Sam’s experiences economies of scale as output increases to 9
gallons an hour, …
constant returns to
scale for outputs
between 9 gallons
and 12 gallons an
hour, …
and diseconomies of
scale for outputs that
exceed 12 gallons an
hour.

MARKET EQUILIBRIUM
1. Excess demand cause the
price to rise
2. Excess supply cause
the price to drop
● market equilibrium
A situation in which the quantity
demanded equals the quantity
supplied at the prevailing market
price.

SUPPLY - SUMMARY
Supply: A Summary

ELASTICITY & CHANGES IN THE EQUILIBRIUM
 Equilibrium price and equilibrium quantity in a
given market are determined by the intersection of
the supply and demand curves.
 Depending on the elasticities of supply and demand,
the equilibrium price and quantity can behave
differently with shifts in supply and demand.

 If demand is very elastic, then shifts in the supply curve will
result in large changes in quantity demanded and small
changes in price at the equilibrium point.

If demand is very inelastic, however, then shifts in the supply curve
will result in large changes in price and small changes in quantity at
the equilibrium point.

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 Will tomorrow’s world be more prosperous than
today?
 Will jobs be plentiful?
 Will the cost of living be stable?
 Will the government and the nation remain in
deficit?
Macroeconomics questions

 Five widely agreed policy challenges for
macroeconomics are to:
1. Boost economic growth
2. External stability/balance of payments
3. Lower unemployment / Full employment
4. Price stability
5. Equitable distribution of wealth (income)
Macroeconomic Policy Challenges
and Tools

 Two broad groups of macroeconomic policy tools
are :
 Fiscal policy—making changes in tax rates and
government spending
 Monetary policy—changing interest rates and changing
the amount of money in the economy
Macroeconomic Policy
Challenges and Tools

The Circular Flow
This model captures the essential essence of
macroeconomic activity
The circular flow model illustrates the
mechanism by which income is generated from
goods and services and how this income is spent.
This provides the basis for the way economists
think about the interactions between different
parts of the economy and the measurement of
economic activity

The Circular Flow of income n spending

MACROECONOMIC
VARIABLES
 Gross Domestic Product (GDP)
 Inflation
 Unemployment
 Balance of payments

Gross Domestic Product
GDP Defined
 GDP or gross domestic product, is the market
value of all final goods and services produced in a
country in a given time period.
 This definition has four parts:
 Market value
 Final goods and services
 Produced within a country
 In a given time period

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 Market Value
 GDP is a market value goods and services are
valued at their market prices.
 To add apples and oranges, computers and ice
cream, we add the market values so we have a
total value of output in rands.

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 Final Goods and Services
 GDP is the value of the final goods and
services produced.
 A final good (or service) is an item bought by
its final user during a specified time period.
 A final good contrasts with an intermediate
good, which is an item that is produced by one
firm, bought by another firm and used as a
component of a final good or service.

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 Excluding intermediate goods and services avoids a
problem called double counting.
 Produced Within a Country
 GDP measures production within a country domestic
production.
 In a Given Time Period
 GDP measures production during a specific time period
Excluding intermediate goods and services avoids
double counting normally a year or a quarter of a
year.

GDP, INCOME, AND
EXPENDITURE
Figure 1
shows the
circular flow
of income
and
expenditure.

 Real GDP is the value of final goods and
services produced in a given year when valued
at constant prices.
 The first step in calculating real GDP is to
calculate nominal GDP.
Nominal GDP
 Nominal GDP is the value of goods and
services produced during a given year valued at
the prices that prevailed in that same year.
Nominal vs Real GDP

 Inflation is a a continuos and considerable rise in
price level in general.
 The commonly used indicator of general price
level is the CPI
 To calculate inflation rate - is the percentage
change in the price level.
Inflation
100
(P1 – P0)
P0

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Is Inflation a Problem?
 Unpredictable changes in the inflation rate are a problem
because they redistribute income in arbitrary ways between
employers and workers and between borrowers and
lenders.
 A high inflation rate is a problem because it diverts
resources from productive activities to inflation forecasting.
 Eradicating inflation is costly because it brings a period of
greater than average unemployment.
Inflation

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When an inflation occurs ____________.
 all prices are rising
 oil prices are rising
 all families are spending more money on food
 prices on the average are rising

Unemployment is a state in which a person
does not have a job but is available for work,
willing to work, and has made some effort to
find work within the previous four weeks.
Types of Unemployment
 Frictional unemployment
 Structural unemployment
 Cyclical unemployment
 Seasonal unemployment
 Disguised/ Hidden unemployment
Unemployment
defined

Frictional unemployment – This is
unemployment caused by people moving in
between jobs, e.g. graduates or people
changing jobs. There will always be some
frictional unemployment.
Unemployment

Structural unemployment is
unemployment created by changes in
technology and foreign competition that
change the skills and location match
between jobs and workers.
Cyclical unemployment is the fluctuation
in unemployment caused by the business
cycle e.g. in a recession AD & thus output
falls.
Unemployment

Seasonal unemployment is occurs when
employees only work during a certain time(s) of
the year and therefore during other months they
are regarded as unemployed.
Disguised/Hidden unemployed is said to exist if
people who were previously fully employed,
have had their hours.(& salaries) reduced
because of poor business performance
Unemployment

Why Unemployment Is a Problem
 Unemployment is a serious economic, social, and
personal problem for two main reasons:
 Lost production and incomes
 Lost human capital
 Lost production and income is serious but
temporary.
 Lost human capital is devastating and permanent.
Costs of unemployment

Balance of payments
A country’s balance of payments accounts
records its international trading, borrowing and
lending. It consists of 4 basic accounts:
1. Current account – reflects the rand value of the goods and
services exported and imported during the period
2. Capital account – records all international borrowing and
lending.
3. Financial account-international transactions involving
financial assets including the borrowing & lending of funds
4. Unrecorded transactions- all errors & ommissions that occur
in compiling the individual components of the BOP.

Economic growth is the expansion of the economy’s
production possibilities—an outward shifting PPF.
We measure economic growth by the increase in real
GDP.
Real GDP—real gross domestic product—is the
value of the total production of all the nation’s farms,
factories, shops, and offices, measured in the prices of
a single year.
Economic Growth

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The Causes of Economic
Growth: A First Look
For economic growth to persist, people
must face incentives that encourage them to
pursue three activities
 Saving and investment in new capital
 Investment in human capital
 Discovery of new technologies
 An increase in labour supply
 Decrease in human capital
 Increase in productivity

The Causes of Economic Growth
Saving and Investment in New Capital
 The accumulation of capital has dramatically increased
output and productivity.
Investment in Human Capital
 Human capital acquired through education, on-the-job
training, and learning-by-doing has also dramatically
increased output and productivity.
Discovery of New Technologies
 Technological advances have contributed immensely to
increasing productivity.

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Ongoing economic growth requires all of
the following except _____________.
 saving and investment in new capital
 the discovery of new technologies
 population growth
 investment in human capital

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Measuring Economic Growth
When GDP increases, we know that either
We produced more goods and services or
We paid higher prices
Producing more goods and services contributes
to an improvement in our standard of living.
Expansion of production is economic growth.
Economic growth is not a smooth process and
hence is related to a phenomenon called
business cycle

Basic economics ppt

Basic economics ppt

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