Post on 06-May-2015
Economics for Management
GSB728
Topic 1:
Alternative Value Systems and Basic Concepts in Economics
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Note: This lecture note was prepared based on the teaching material provided
by the publisher of the textbook Principles of Economics.
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Learning Objectives
1. Value Systems.
2. The economic problem: What is economics all about?
3. What is meant by ‘macroeconomics’ and ‘microeconomics’?
4. Modelling economic relationships: How can diagrams be used to illustrate economic issues?
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Value Systems
• How do we value things?
– Individuals place different values on goods, services and assets depending on their personal preferences and circumstances.
– Societies need a system for valuing things.
– Different Value Systems include:• Traditional Value Systems (prices set by monarchs).
• Labour Value Systems (prices set by gov. based on L).
• Scarcity or Market Value Systems.
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The Economic Problem
• What is economics all about?
– Production and consumption: Satisfying human needs with available resources.
– Scarcity is the central economic problem: Potentially unlimited human needs and limited resources.
– Demand and supply: Help solve scarcity by reconciling resources and needs.
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What is Macroeconomics?• Macroeconomics is the branch of economics that
studies economic aggregates (grand totals).– Examples: the overall level of prices, output and
employment in the economy.
• Macroeconomic issues: - Managing demand and supply aggregates.
- Encouraging national economic growth.
- Minimising inflation.
- Managing the balance of trade.
- Managing cyclical economic fluctuations.
- Minimising unemployment.
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• Microeconomics is the branch of economics that studies individual units (e.g.: households, firms and industries).
• Microeconomic issues:– The choices to be made:
• What to produce?• How to produce?• For whom to produce?
– Recognise the Opportunity Cost (cost of any activity measured in terms of the best alternative forgone).
– Making Rational Decisions (Benefits vs. Opportunity Costs).
– Marginal Benefits vs. Marginal Costs (of doing an extra unit).
– The social implications of choice (consequences).
What is Microeconomics?
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Modelling Economic Relationships: Production Possibility Curve
• Diagrams:– Represent ‘models’ in economics.– Illustrate basic economic
relationships.– Simplify and explain economic issues.
• Production possibility curve (PPC):
- A fundamental economic ‘model’.
- Illustrates society’s production choices.
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Production Possibility Curve
Derivation of a Production Possibility Curve
00.1
0.2
0.3
0.4
0.5
0.600000000000001
0.700000000000001
0.8
0.9
11.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
22.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
33.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
44.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
55.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
66.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
77.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
80
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2
3
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7
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Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
8.0 0.0 7.0 2.2 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0
A Production Possibility Curve
10Source: Sloman et al. (2014).
00.1
0.2
0.3
0.4
0.5
0.600000000000001
0.700000000000001
0.8
0.9
11.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
22.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
33.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
44.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
55.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
66.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
77.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
80
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2
3
4
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Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
a 8.0 0.0 7.0 2.2 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0
a
Units of clothing (millions) 11
A Production Possibility Curve (contd.)
Source: Sloman et al. (2014).
00.1
0.2
0.3
0.4
0.5
0.600000000000001
0.700000000000001
0.8
0.9
11.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
22.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
33.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
44.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
55.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
66.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
77.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
80
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2
3
4
5
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7
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Units of food Units of clothing (millions) (millions)
8.0 0.0b 7.0 2.2 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0
b
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Un
its o
f foo
d (
mill
ion
s)
Units of clothing (millions)
A Production Possibility Curve (contd.)
Source: Sloman et al. (2014).
00.1
0.2
0.3
0.4
0.5
0.600000000000001
0.700000000000001
0.8
0.9
11.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
22.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
33.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
44.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
55.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
66.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
77.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
80
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7
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Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
8.0 0.0 7.0 2.2c 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0
c
Units of clothing (millions) 13
A Production Possibility Curve (contd.)
Source: Sloman et al. (2014).
00.1
0.2
0.3
0.4
0.5
0.600000000000001
0.700000000000001
0.8
0.9
11.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
22.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
33.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
44.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
55.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
66.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
77.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
80
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4
5
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7
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Un
its o
f foo
d (
mill
ion
s)
x
w
Units of clothing (millions)
A Production Possibility Curve [Figure 1.1]
14Source: Sloman et al. (2014).
(Efficient)
(Impossible)
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Modelling Economic Relationships
• Economists use diagrams and equations as tools to illustrate economic issues.
• These tools are called ‘models’.
• The production possibility curve (PPC) is a specific economic model.
• The PPC shows all possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.
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• We can use diagrams to illustrate economic issues!!
– Microeconomics and the PPC:
• Choice creates opportunity cost.
• Opportunity cost increases.
– Macroeconomics and the PPC:
• Production within the curve.
• Shifts in the curve
Modelling Economic Relationships (contd.)
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Production Possibility Curve
Opportunity Cost and the PPC
00.1
0.2
0.3
0.4
0.5
0.600000000000001
0.700000000000001
0.8
0.9
11.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
22.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
33.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
44.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
55.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
66.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
77.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
80
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3
4
5
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Un
its o
f foo
d (
mill
ion
s) x
y
Z
Units of clothing (millions)
Increasing Opportunity Costs [Figure 1.2]
1
12
1
18Source: Sloman et al. (2014).
3
1
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Production Possibility Curve
Resource Use and the PPC
V
X
Y
O
Foo
d
Clothing
Production inside theproduction possibility curve
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Making a Fuller Use of Resources [Figure 1.2]
Source: Sloman et al. (2014).
(Efficient)
(Efficient)
(Inefficient)
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Production Possibility Curve
Shifts in the PPC
O
Foo
d
Clothing 22Source: Sloman et al. (2014).
Growth in Actual Output
O
Foo
d
x
Clothing
x1
23Source: Sloman et al. (2014).
Growth in Actual Output (contd.)
O
Foo
d
Clothing 24Source: Sloman et al. (2014).
Growth in Potential Output [Figure 1.4]
O
Foo
d
Clothing
Now
5 years time
x
x1
25Source: Sloman et al. (2014).
Growth in Potential Output [Figure 1.4] (contd.)
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Modelling Economic Relationships: Circular Flow of Goods and Income
• The circular flow of goods and incomes:
– Firms and households.
• Money flows from households to firms while goods and services flow from firms to households.
• In addition, firms pay money to households to use factors of production owned by households (labour, land and capital).
– What is a market?• Interaction between buyers and sellers (could be on street
market, shop, internet, etc.)
– Goods markets:
• Real flows: goods and services
Goods & services
Circular Flow of Goods and Incomes - I
27Source: Sloman et al. (2014).
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• The circular flow of goods and incomes:– Firms and households
– What is a market?
– Goods markets:
• Real flows: goods and services
• Money flows: consumer expenditure
Circular Flow of Goods and Incomes (contd.)
Goods & services
$Consumerexpenditure
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Circular Flow of Goods and Incomes - II
Source: Sloman et al. (2014).
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• The circular flow of goods and incomes:– Firms and households.
– What is a market?
– Goods markets:
• Real flows: goods and services.
• Money flows: consumer expenditure.
– Factor markets:
• Real flows: services of labour and other factors.
Circular Flow of Goods and Incomes (contd.)
Goods & services
$Consumer
expenditure
The services of the factors of production
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Circular Flow of Goods and Incomes - III
Source: Sloman et al. (2014).
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• The circular flow of goods and incomes:– Firms and households.
– What is a market?
– Goods markets:
• Real flows: goods and services.
• Money flows: consumer expenditure.
– Factor markets:
• Real flows: services of labour and other factors
• Money flows: wages and other incomes.
Circular Flow of Goods and Incomes (contd.)
Goods and services
$Consumerexpenditure
The services of the factors of production
Wages, rent,dividends, and so on
$
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Circular Flow of Goods and Incomes – IV [ Figure 1.5]
Source: Sloman et al. (2014).
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• The circular flow of goods and incomes:
– Macroeconomic issues:• The size of total flows.
– Microeconomic issues:• Individual markets.
• Composition of the circular flow: Choices made in markets of goods and factors (specific goods and factors traded).
Circular Flow of Goods and Incomes (contd.)
References
Morales, L. E., Simons, P. and Valle de Souza, S. (2014). GSB728: Economics for Management [Topic Notes]. Armidale, Australia: University of New England, Graduate School of Business.
Sloman, J., Norris, K and Garratt, D. (2014). Principles of Economics (4th ed.). French Forest, Australia: Pearson.
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