eco1101 economic concepts, issues and tools
TRANSCRIPT
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Today Lecture
Economic Systems
Price Mechanism
Positive and Normative Economics
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Introducing Economics
Economic Systems
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Totally
planned
economy
Classifying economic systems
Totally
free-market
economy
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Totally
planned
economy
N. Korea
Cuba Poland France
UK
USA
Mid 1980s
China Hong
Kong
Classifying economic systems
Totally
free-market
economy
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Totally
planned
economy
N. Korea
N. Korea
Cuba
China
Poland
Poland France
France
UKUSA
USA
Mid 1980s
Late 2000s
China Hong
Kong
CubaChina
(HongKong)
Classifying economic systems
UK
Totally
free-market
economy
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[I] The Command Economy
all economics decisions are taken bythe central authorities. For example:socialist or communist
the state plans the allocation of resources at3 important levels:
consumption and investment
allocation of resources between currentconsumption and investment for thefuture
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[I] The Command Economy
matching of inputs and outputs
plan the resources required by eachindustry and firm
plan the output produced by industryand firm
distribution of output between
consumers.
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Advantages of a command economy
high investment, high growth
stable growth social goals pursued
low unemployment
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Problems of a command economy
problems of gathering information
expensive to administer
inappropriate incentives
shortages and surpluses
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[II] The free-market economy
Base on demandand supplydecisions
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Advantages of a free-market economy
transmits information between buyers and sellers,economy functions automatically
no need for costly bureaucracy to coordinateeconomic decisions
incentives to be efficient as competition betweenfirms keeps prices down
competitive markets responsive to consumers
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Problems of a free-market economy
competition may be limited: problem of market power, a fewgiant firms may dominate an industry
power and property may be unequally distributed
the environment and other social goals may be ignored.
some socially desirable goods would simply not be producedby private enterprise
ethical objection encourage selfishness, greed, materialismand acquisition of power
Macroeconomic instability: periods of recession with high
unemployment and falling output & periods of inflation.
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[III] The Mixed Economy
A market economy where there is some governmentintervention. Government may control the following:
relative prices of goods and inputs, by taxing orsubsidising them or by direct price controls
relative incomes, by the use of income taxes,welfare payments or direct controls over wages,profits, rents, etc
the pattern of production and consumption, by theuse of legislation, by direct provision of goods andservices, or by nationalisation.
Macroeconomics policies
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Price Mechanism
price respond to shortages and surpluses
shortages, P increases
surpluses, P decreases
equilibrium price : demand = supply
response to changes in demand andsupply
act as both signalsand incentives
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How does the price mechanism acts as signals and incentives
a change in demand a rise in demand signaledby a rise in price
a rise in price acts as incentives for firms to
increase the supply
a change in supply
a rise in supply signaledby a fall in price
a fall in price acts as incentivesfor demand to rise
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Goods Market
Dg shortage
(Dg> Sg)
Pg
Sg
Dg
until Dg = Sg
The price mechanism:
the effect of a rise in demand
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Goods Market
Dg shortage
(Dg> Sg)
Pg
Sg
Dg
until Dg = Sg
Factor Market
SgSf
Df
until Df = SfDf shortage
(Df> Sf)
Pf
The price mechanism:
the effect of a rise in demand
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Attempt Question!
Q: Can you think of any examples where prices and wagesdo not adjust very rapidly to a shortage or surplus? For
what reasons might they not do so?
A: (1) Many prices set by companies are adjusted relatively
infrequently: it would be administratively too costly tochange them every time there was a change in demand. Forexample a mail order company, where all the items in its
catalogue have a printed price, would find it costly to adjustprices very frequently, since that would involve printing a
new catalogue, or at least a new price list.(2) Manywages are set annuallyby a process of collective
bargaining. They are not adjusted in the interim.
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Attempt Questions!
Why do the prices of fresh vegetables fallwhen they are in season? Could an
individual farmer prevent the price falling?
Because supply is at a high level. Theincreased supply creates a surplus which
pushes down the price. Individual farmerscould not prevent the price falling. If they
continued to charge the higher price,consumers would simply buy from those
farmers charging the lower price.
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Attempt Questions!
If you were the owner of a clothes shop, how wouldyou set about deciding what prices to charge for
each garment at the end of season sale?
You would try to reduce the price of each item aslittle as was necessary to get rid of the remaining
stock. The problem for shop owners is that they donot have enough information about consumer
demand to make precise calculations here. Many
shops try a fairly cautious approach first, and then,if that is not enough to sell all the stock, they make
further end of sale reductions later.
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Attempt Question!
The number of owners of compact disc players has grownrapidly and hence the demand for compact discs has alsogrown rapidly. Yet the prices of discs have fallen. Why?
The costs of manufacture have fallenwith improvements in
technology and mass-production economies. Competition from increased numbers of manufacturers has
increased supply and driven prices down.
Budget-priced CDs of original analogue recordings cost less
to produce (there are no new studio costs). In the early 2000s, the advent of copying CD tracks from
the Internethas reduced the demand for CDs. This changein demand has further compounded the fall in price.
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A. A risein the price of the good and afallin theprice of factors used to make it.
B. A risein the price of the good and a risein theprice of factors used to make it.
C. Afallin the price of the good and afallin the
price of factors used to make it.
D. Afallin the price of the good and a risein theprice of factors used to make it.
Assume that there is a fall in demand fora good. Ceteris paribus, this will result in:
Q
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A. Rise.
B. Fall.
C. Stay the same.
D. It depends on whythe supply of good X hasrisen.
If there is a rise in supply of good X,what will subsequently happen to theprice of a factor used to make good X?
Q
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Positive Economics
A statement of FACT
unemployment is rising
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Normative Economics
A statement of VALUE
(ought or ought not to, good or bad,desirable or undesirable)
the government ought to reduce theunemployment
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Attempt Questions!
Which of the following are positive statements and whichare normative?
(a) Cutting the higher rates of income tax willredistribute incomes from the poor to the rich.
(b) It is wrong that inflation should be reduced if thismeans that there will be higher unemployment.
(c) It is incorrect to state that putting up interest rateswill reduce inflation.
(d) The government should introduce road pricing toaddress the issue of congestion.
(e) Current government policies should be aimed atreducing unemployment.
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Answers
(a) Positive. This is merely a statement about what wouldhappen.
(b) Normative. The statement is making the value judgementthat reducing inflation is a less desirable goal than theavoidance of higher unemployment.
(c) Positive. The statement is making a claim that can betested by looking at the facts. Do higher interest rates reduceinflation, or dont they?
(d) Normative. It is expressing the value judgement that the
government oughtto address the problem of trafficcongestion and that road pricing is the best way.
(e) Normative. It is saying that the government oughttodirect its policies towards reducing unemployment.
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A. Unemployment is higher this year than last.
B. Unemployment will rise.
C. Economists predict that unemployment will rise.
D. Raising taxes will cause unemployment to rise.
E. The government should cut taxes and thereforereduce unemployment.
Q Which one of the following is anormative statement?
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THE END
Please try to End of ChapterQuestions in the text book,
page 28, Q1 to Q8.Reference: Chapter 1 in
Sloman text book and 8 docsin Facebook ECO1101