1 economic systems engineering economics lecture 22 27 january 2010 economic systems production...
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Economic Systems
Engineering EconomicsLecture 2227 January 2010
Economic Systems
Production Possibilities Frontier (PPF)
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Why are economies around the world growing Why are economies around the world growing
more market oriented?more market oriented?
How much can an economy produce with the How much can an economy produce with the
resources available?resources available?
Can you actually save time by applying Can you actually save time by applying
economic principles to your family chores?economic principles to your family chores?
Why is ‘experience’ a good teacher?Why is ‘experience’ a good teacher?
Why is ‘fast food’ so fast?Why is ‘fast food’ so fast?
ConsiderConsider
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INFINITE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE
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Best case scenario:Best case scenario:
Maximize our satisfaction with our limited resources,Maximize our satisfaction with our limited resources,
i.e. choose how to use our resources to our greatest i.e. choose how to use our resources to our greatest advantageadvantage
ECONOMISEECONOMISE
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1. LAND – all natural resources
2. LABOUR – human effort involved in production
3. CAPITAL – money, machinery, equipment for manufacturing
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Three Economic Questions
All economies must answer these three questions:
1.1. What goods and services will be produced?
2.2. How will they be produced?
3.3. For whom will they be produced?
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‘Real Economy’ versus ‘Money Economy’
Q: Would the wealth & standard of living of the country
increase if the Government printed more money?
The real economy is concerned with the amount of Goods &
Services available to the population - e.g., shopping centres,
public transport, quantity of food, number of hospital beds
etc..
Whereas, money has no intrinsic value – it merely enables
transactions to take place – it can be exchanged for G&S’s
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Money
• Money is a liquid asset (can easily be converted into other assets)
• The functions of money:
medium of exchange
unit of account
a store of wealth
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Economic System All economies face the ‘economic problem’All economies face the ‘economic problem’ Society must adopt an economic systemSociety must adopt an economic system in in
order to allocate their resourcesorder to allocate their resources When allocating resources, the society must When allocating resources, the society must
consider 3 questions:consider 3 questions: What is to be produced?What is to be produced? How are the goods to be produced?How are the goods to be produced? For whom?For whom?
Society’s answers to these questions will Society’s answers to these questions will determine which economic system they determine which economic system they adopt: Capitalist, Mixed , Socialist or Islamicadopt: Capitalist, Mixed , Socialist or Islamic
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Economic System An economic system is the set of
mechanisms and institutions that resolves the what, how, and for whom questions.
Some standards used to distinguish among economic systems are:
Who owns the resources?
Allocation of resources?
Incentives and rewards?
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Market Economy - Capitalism
All resources are privately owned
Economic activity is based on the prices
generated in competitive markets
Any income derived from selling resources
goes exclusively to each resource owner
Also called capitalism
USA Model
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Capitalist Economic System
Free enterprise system
Price mechanism - Competition
Privately owned resources
Profit motive
Sovereignty of Dollar
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Advantages of Capitalist System
Encourages most efficient methods of production by private businesses (profit motive)
Encourages competition in production techniques
Allows economic freedom
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Problems with Market EconomiesProblems with Market Economies
Difficulty enforcing property rights
Some people have few resources to sell
No public service motive except for some
essential
Inequality in distribution of goods & services
Monopoly lead to unfair practices
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Centrally Planned Economy - SocialismCentrally Planned Economy - Socialism
All resources government owned
Economy by the central plans of government
Sometimes called Socialist Economy
Use visible central planners
UK Model
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Problems with Centrally Planned EconomiesProblems with Centrally Planned Economies
Consumers get low priority
Little freedom of choice
Central planning can be inefficient
Resources owned by the state are
sometimes wasted
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Mixed Economy
Market economy + Social Economy
Government regulates the private
sector in a variety of ways.
China & Pak Model
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Features of Mixed Economies Monetary system & legal system Controlling monopolies Provision of essential goods & services Regulating undesirable business practices Alleviate inequality in society (progressive
tax, social welfare) Attempting to provide stable economy
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Islamic Economy
Sovereignty of Allah
Circulation and not accumulation
Money is for help to get better reward in
the world hereafter – social welfare
Discourages lust, greed and materialism
Discourage wrong means
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Production Possibilities Frontier (PPF)
PPF model PPF model Shows possible combinations of Shows possible combinations of
types of goods that can be produced types of goods that can be produced when available resources are used when available resources are used fully and efficientlyfully and efficiently
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Production Possibilities Frontier
A through F are attainable
I represents inefficient use of resources
U represents unattainable combinations
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Reasons of Shifts in the PPF
Economic Growth – an expansion in the
economies ability to produce
Changes in resource availability
Increases in stock of capital goods
Technological change
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Shifts in the PPF
Increase in available resources Decrease in available resources
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Thanks we have finished the
course