Ing. Pablo San Andres.

Economics. Economics is the social science that analyzes the production, distribution,

and consumption of goods and services.

Microeconomics

The branch of economics that analyzes the market behavior of

individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers.

It is focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.

A fall in the supply of strawberries perhaps due to a poor harvest, has caused and increase in price and reduced the quantity demanded

Macroeconomics Macroeconomics is concerned primarily with

the forecasting of national income, through the analysis of major economic factors:

• Employment/unemployment • Gross Domestic Product (GDP) • Balance of payment position • Prices (Deflation or inflation)

It studies the behavior of the whole (aggregate) economies or economic systems instead of the behavior of individuals, individual firms or markets (which is the domain of Microeconomics)

Often with the aim of studying the effect of government policy on these factors

Positive economies

It is the branch of economics that concerns the description and

explanation of economic phenomena.

For example:

The price of milk has risen from $3 a gallon to $5 a gallon in

the past five years.

It can be proven true or false by comparison against real-world

data. In this case, the statement focuses on facts.

Normative economics

It is the part of economics that expresses value judgments

about economic fairness or what the economy ought to

be like or what goals of public policy ought to be.

For example:

The price of milk should be $6 a gallon to give dairy

farmers a higher living standard and to save the family

farm.

This specific statement makes the judgment that farmers

need a higher living standard and that family farms

need to be saved

They are resources that must be used to produce a good or to provide a service.

Land: Natural resources found on the planet that are available to production.

Labour: Physical and mental effort of people used in the production of a good or service

Capital : Non-natural (manufactured) resources that are used in the creation and production of other products

Investment in Human Capital

Economic growth

Physical capital

Investment capital

Enterprise: It’s also known as entrepreneurship, because it refers to the management, organization and planning of the other three factors of production

It is what you give up in order to have something else.

The opportunity cost walking to school= 20 minutes

The opportunity cost taking a taxi= What I can do with the money paid for the service and health

benefits.

Exercise By taking an airplane Larry can travel from Denver to

Houston in one hour. The same trip takes 5 hours by bus. Airfare is $90 and the bus fare is $30.

Larry, when he is not traveling, can work and earn

$30/hour. Answer the following questions: 1) What is the opportunity cost (OC) for Larry of traveling by

bus? 2) What is the OC for Larry of traveling by plane? 3) Which is the cheaper mode of travel for Larry? 4) How would the answers be different for another person

Moe (who can work and earn $6/hour when he is not traveling)?

Solution: 1) OC = (Total cost) + (Bus Fare) + (Time Cost) = $30 + (5 hours) ($30/hour) = $30 + $150 = $180 2) OC = $90 + (1 hour)($30) = $120 3) Plane is cheaper for Larry 4) For Moe, OC (bus) = $30 + (5 hours)($6/hour) = $60 OC (plane) = $90 + (1 hour) ($6/hour) = $96 Therefore, bus is cheaper for Moe.

Scarcity

We use different type of resources to satisfy our

wants:

Resources

Natural resources

air, water, land and

oil

Human resources:

labour

Man made resources:

machines

It is the fundamental economic problem of having humans who have wants and needs in a world of limited resources.

It states that society has insufficient productive resources to fulfill all human wants and needs

Scarcity implies that not all of society's goals can be pursued at the same time.

WANTS ARE MORE THAN

WHAT IS AVAILABLE

http://www.socialstudiesforkids.com/articles/economics/scarcityandchoices1.htm

People with high time value (e.g. busy executives) are more likely to travel by plane than by bus; whereas, people with low time value (seniors, students on vacation) are more likely to travel by bus.

If a good or service has an opportunity cost then it must be relatively scarce in supply, so it will have a price and be classified as an “Economic good”, human effort is required to obtain it.

Free good

A good that is not scarce.

A free good is available in as great a quantity as desired with zero opportunity cost to society.

Abundant supply, and needs no conscious effort to obtain it

• On a magazine, there

is a list of ice-cream

coupon. The coupon

are free of charge.

• Does mean that the

coupon are free

goods?

• The coupons are not a

free good. The quantity

of coupons are scare. It

is costly to produce and

• use. So the coupons

are

• not a free good.

In case

Depending on how we use goods, goods

can classified into two types.

Consumer goods Capital goods

Consumer goods are the

goods produced for

direct consumption.

Capital goods are the

goods produced for

production of other

goods.

The basic economic problem

As resources are scare, we need to face three basic economic problems.

1.- What will be produced?

Question is concerned with what products and in what quantities they are to be produced.

2.- How will it be produced?

Question is concerned with the method of production.

Should crops be grown with high usage of fertilizer or organically?. There are different ways of producing things. There are different combination of resources

3.- For whom will it be produced?

How those goods or services are distributed?

Market economy & Planned economy

• Private ownership of property is widespread.

• people are free to make production and consumption decisions.

• Private

ownership of

property is

limited.

• Government

makes

production

decisions.

Planned

economy

Market

economy

How they solve problems

The what question:Market prices serve as signals in deciding what goods to produce and in what quantities.

The how question:

Producers are interested in finding the lowest cost method of production; factor prices guide them in their choice of production method.

The for whom question:

People’s ability to pay

determines the quantity

of goods they can get. Market

economy

Plannedeconom

y

The what question: The

government draws up its

production plans, and

decides what goods and in

what quantities to produce.

The for whom question:

The government controls

people’s wage rates and

ability to pay. Coupons

are given to people to

ration the limited goods

available.

The how question:

The method of

production is

determined by

central planning.

These essential questions must be answered in every economy to determine the fundamental goals of the society. How each society handles these questions is determined by the role of government and the people in the decision-making process. Each group of people makes decisions or fails to make decisions that control the flow of money, goods, and services. The control of these decisions determines the type of economy present

How resources are allocated is the process of choosing which needs will be satisfied and how much of the limited resources will be used to satisfy those needs. Allocation by definition indicates choice.

Economics is the social science that deals with how society allocates its scarce resources among the unlimited wants and needs of individuals that make up that society.

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