lecture 1 student

8/2/2019 Lecture 1 Student

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Week 1

IntroductionEconomic Issues

Business

EconomicsC21BE2


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Outline

Course Information Lectures

Assessment

VLE (Vision)

Teaching Staff

Why study Economics?

Some introductory thoughts

What do Economists study?


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Why Study Economics

To understand the world we live in

To acquire useful skills

To improve job prospects and earnmore money

To improve the lives of others


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What is economics about?

Is it about money?

It has a lot to do with money.

..but it is more than just the study of money


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Economics the subject is traditionally dividedin two

Macroeconomics (Later this semester)

Study of economic aggregates e.g. growth, unemployment, inflation, balance of

payments, economic cycles

Microeconomics (First this semester)

Study of individual units

e.g. households, firms, industries and how they

relate to one another


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In a rather narrow sense economics is

concerned withProduction and consumptionof goods and services

The central economic problem is


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Scarcity

Scarce Resources relate to

1. Human - Labour limited by quantity andquality

2. Natural Land and raw materials

3. Manufactured - Capital goods limitedby quantity and technology available


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Choice

Unlimited wants can be related toconsumption and demand for goods and

services Scarce Resources can be related toproduction and supply of goods and

services Choices have to be made


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3 main categories of choice to be made

goods and services to produce?

will production take place?

are things produced?


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Micro Examples

Individual choice in consumption IPod vs Bicycle

Hair cut vsCinema tickets

Firms choice in production

Ferrari vs Fiat

Employment Agency vs Letting Agency

Government choice in budget allocation Education vs health

Roads vs railway


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Basics

Economists analyse

issues which result from scarcity andunlimited wants.

They review the options or choices

available under . Almost every choice has a cost or requires

a sacrifice. Choice is constrained by time

and/or income.


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Choice involves sacrifice

Individual choice e.g. go for a swim or go to the cinema

e.g. gap year vs study year

Societys choices e.g. spend more on transport or education

The sacrifice of alternatives in the production orconsumption of a good is known as its


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Opportunity Cost

First basic concept in economics

Opportunity cost= the costs of any activity

measured in terms of the best

alternative forgone

What you

GIVE UP/TO GET


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Example

Individual choices: what did you pay for the coffee or cinema ticket?

(not very enlightening)

What did you forgo (give up) to enjoy what youconsumed?

e.g. If coffee = 1, cinema ticket = 3 then

Cost of 3 coffees is one cinema ticket

Cost of one more cinema ticket is 3 coffees

Opportunity cost of coffee = 1/3 of a cinema ticket

Opportunity cost of a cinema ticket = 3 coffees

Societys choices: e.g. does government build roads or schools?

Cost of school in terms of miles of road


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QQ Assume Sarah shops in her lunch break andAssume Sarah shops in her lunch break and

spendsspends 30. What is the opportunity cost of this30. What is the opportunity cost of thisactivity to Fiona?activity to Fiona?

A. Missing lunch.

B. Any alternative use of the time taken to shop.

C. Any alternative use of the 30.

D. Sarahs best alternative use of both the 30 and

the time it takes to shop.


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One other idea

We generally assume consumers makeRATIONAL choices

i.e. they weigh up the benefit of any activityagainst its opportunity cost

choose the course of action with the greatest

benefit relative to cost

Economists use many graphs and diagrams

to illustrate or describe or analyse clearly.


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To illustrate choice and opportunity cost, we canuse a

Also known as:

Production possibility boundary / curve / frontier

Transformation boundary / curve / frontier


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Consider a simple economy

Produces 2 types of goods Food

Clothing

Questions How should the economys productive resources

(factors of production) be divided between thesetwo sectors?

What should be produced?

We can use the Production Possibility Curve

A Production Possibility CurveA Production Possibility Curve


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0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

Units of clothing (millions)

Unitsoffo

od(millions)

Units of food Units of clothing(millions) (millions)

8m 0.07m 2.2m

6m 4.0m5m 5.0m4m 5.6m

3m 6.0m2m 6.4m

1m 6.7m0 7.0m

A Production Possibility CurveA Production Possibility Curve

A Production Possibility BoundaryA Production Possibility Boundary


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0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

Units of clothing (millions)

Unitsoffo

od(millions)

x

A Production Possibility BoundaryA Production Possibility Boundary

w

v


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PPC illustrates

What should be produced?

Whether production is efficient

How to make better use of current

resources

Scarcity

Opportunity Cost


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O

Food

Clothing

Now

Economic GrowthEconomic Growth

5 years time


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QQ Which of the following would shift theWhich of the following would shift the

production possibility curve outwards?production possibility curve outwards?

A. An increase in the population of working age.

B. A reduction in unemployment.

C. A reduction in VAT.

D. An increase in the general level of prices.

E. A reduction in expenditure on education.


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Key Reading

Sloman and Garratt (5th Edition) Chapter 1

Note boxes and definitions

Key Concepts

Scarcity and Choice, Rationality, Opportunity Cost.

Key Diagram

Production Possibility Curve

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