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National Economy

• National Economy

An economy is a mechanism comprised of decision makers (such as households, firms & the government) and institutions (such as markets & a legal system with established property rights) that allocates scarce resources among alternative uses.

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NATIONAL ECONOMY

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National Economy

• Household

Any group of people living together as a decision making unit

Examples: Roommates ordering a pizza; a family at the grocery store

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National Economy

• Firm

An organization that uses resources to produce goods and services

Examples: Lemonade Stand Vs. IBM

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National Economy

• Government

An organization that establishes & maintains the institutions which enable the smooth functioning of the economy

Examples: Federal, State & Local governments

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National Economy

• Technology

A recipe or formula for combining raw materials and goods into other goods

Examples: Lemonade recipe Vs. Formula for the next generation chip

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National Economy

• Factors of production

Given a technology anything that can be used to produce a good is called a factor of production

Examples: Land, Labor, Capital & Entrepreneurial Ability

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National Economy• Types of Capital

Financial Capital Stocks, bonds, shares etc.

Physical Capital All the equipment, buildings & tools & goods used to produce other goods & services

Human Capital Education, on the job training etc.

Entrepreneurial Ability A human resource that organizes the other factors of production & bears the business risk

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National Economy

• Factors of Production & Compensation

Land, Capital Rental rate

Labor Wage rate

Entrepreneurs (Residual) Profits i.e the profits left after paying the other factors of production

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National Economy

• Market

A market refers to any situation in which the buyers & sellers can negotiate the exchange of some good or service.

Examples: Byerly’s Vs. International Stock Exchange

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Global Economy

• An economy composed of several national economies that trade amongst themselves.

• Trade Deficit: When Imports exceed exports there is said to be a trade deficit

• Financial Surplus: Since U.S. borrowing (via bonds) exceeds U.S. lending there tends to be a financial surplus.

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Carefully study it.Systematic Observation& Measurement

Confirm / Re-examineNotProve or Disprove

Observe a Phenomenon

Develop a theory to explain the data

Check the implications of your theory against new data from similar circumstances

Philosophy, Art or Science?

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Positive Vs. Normative Economics

• Positive Economics

Statements of fact & logical deductions

Ex: If it rains the football field will get wet.

• Normative Economics

Statements about what should be (value judgments)

Example: The football field is better when it is wet.