Chapter 1: The reasons for individuals, organisations, and societies having to make choises.

When we start to study a new subject firstly we have do decide what our subject is about. So, Economics….. We hear this term very often in our modern life. Especially people who watch TV news and read newspapers. Anyway, lets talk about economics. To find out a definition of our subject lets try to guess what is the most important case of studying Economics ( in the global view). The most important case of studying Economics is solution Economics problem. Economic problem is how to allocate scarce resources in the most effective way among alternative uses. So we can maintain that Economics is the study of how to allocate scarce resources in the most effective way. Actually, there are a lot of different definitions of term Economics, because every economist understands Economics in different ways. We also can hear that ‘ Economics is a social science that studies human behavior as a relationship between ends and scarce means which have alternative uses. That is, economics is the study of the trade-offs involved when choosing between alternative sets of decisions.’ ( Lionel Robbins, economist).

Economics consists of to parts:

Macroeconomics and Microeconomics

 

Microeconomics includes study of how households (a group of people whose spending decisions are connected) and firms make decisions in markets.

Macroeconomics includes study of issues that effect economies as whole.

 

Just for better understanding this information I will give you some examples:

 

Microeconomics: individual decisions, demand, supply

Macroeconomics: government policy, exports, imports, inflation, unemployment, economic growth.

 

As I sad before the basic economic problem is scarce resources. The resources available  in an economy are known as  factors of production. There are four main types of factors of production:

-          Land. This is natural resource. It includes mineral deposits like oil, coal, also it includes river and lakes, trees and plants in terms of using in agriculture area, also see, sun in terms of using in tourism area. You have to remember that the main reward of land is rent.

-          Labour. This is the human resources. It is very important for economy. To increase labour government usually provide training and education. In poor countries the cost of labour is much lower than, for example in the Europe Union. So we can see that a lot of big companies, who produce foods, allocate their factories in the poor countries to spend less on production.

-          Capital. This is form of physical resources. To better understanding, capital is all stuff that companies own( factories, office blocks, machinery, information technology, transport, etc.)

-          Entrepreneurship. This is very particular form of human capital. It covers a group of people who have their own forms or want to start own business. In economics this group of people known as enterprises.  

 

Lets talk about the main economic concepts:

Scarcity (a situation where there no enough resources to meet all people’s needs and wants)

Choice (the selection of appropriate alternarives)

Opportunity cost( the cost of the next best alternative foregone.)

 

So lets talk about needs and wants. You have to understand the differents of this two terms. Needs – is something, with the lack of this people cannot live( for example: water, bread, etc.) But wants – is something, that people want (for example: car, big house, etc.) Just for understanding I will give you this example:

I need to eat(needs), but I want a chocolate(wants).

So as we can see that needs are more important than wants.

Wants are infinite. Even you are Roman Abramovich or Bill Gates, you will always want something new like new car, new mobile phone, etc. Because everyday something new is appearing.

Needs and wants are very important for economists or for entrepreneurs. All firms, managers always think about what to produce and where to produce goods or services to meet people’s needs and wants (this is the main reason of receiving profits for entrepreneurs).

Making choices people always meet with term opportunity cost. For better understanding lets look at this with example. Suppose you have 100 pounds. What will you do with this money? You have to choice where and on what will you spend them. For example you can go and buy a mobile phone, you also can go and buy new headphones, etc. So as we can see you will have a lot of opportunities to spend your money. But you can’t do everything, because you have scarce resources (only 100 pounds). So you have to give up of something to do other thing. In our example you have to give up with buying headphones to buy a mobile phone or you have to give up with buying mobile phone to buy headphones. This is just a simple example for better understanding. Actually, the term opportunity cost is used by all companies to decide how to produce and sell good in most effective way.

 

Specialization and exchange.

  
The problem of scarcity can also includes specialization( situation when individual workers, firms, regions or economies concentrate on a particular task or upon producing some goods and services and not others. This involves that different individuals, firms or countries can produce different goods or services. That’s why it’s necessary to have the term exchange. This term is used on trade between individuals, firms and countries. One of the form of exchange is barter. Barter is when somebody(individual, firm, country) buy goods or services  from others( individual, firm, country ) paying by goods or services. This kind of exchange is very often in poor countries, because some poor countries don’t have enough money to cover all trade relationships. But almost all countries in the world use money for exchange.

In developed economies trade can be internal(domestic) and external (international). Internal trade means all trade relationships inside the country, external trade means trade relationships between different countries.

We can also use the term specialization when we talk about labour. To make our production more effective we have to allocate our labour and give different tasks to different group of labour. Economists call this process Division of labour. So the main case of division of labour is to increase productivity( output, or production of a good or service, per worker). Very goof example of division of labour and high productivity is car industry. In this industry(almost like in others) workers do different jobs. Because some workers can do some job better than another, that’s why we see that all companies are divided in different departments. The main reason for this is higher productivity.

 

Production possibility curves.

Production possibility curve shows the maximum quantities of different combinations of output of two products, given current resources and the state of technology. To show how this economic model works lets imagine that economy produce only two products( cars and television sets).

Lets draw the Production possibility curve.

 

 

For example maximum quantity of produced cars will be 1000 units, and maximum quantity of produced TVs will be 2000. So if we produce only cars we can produce 1000 units of cars, if we produce only TVs we can produce 2000 units. Lets imagine that we want to produce both of them. We have to decide which combination will be the most effective.

Suppose we will produce 250 units of cars and 500 units of TVs(point C). As we can see that point C is allocated inside PPC( on the left side of PPC). This means that we are using not all our resources.

Suppose we will produce 750 units of cars and 1000 units of TVs (point A). As we can see point A is allocated on the PPC, so this means that we are using all our resources.

Suppose we will produce more than 750 units of cars and more than 1500 units of TVs. In this case we will have a lack of our resources, because this point will be outside PPC( on the right side of PPC)

As we can see deciding witch way is more effective we use the term trade-off (the calculation involved in deciding on whether to give up one good for another).

Because of technological advance in all forms in production we can have a change in the PPC.

Increases in ability to produce more TVs

 

In this case we can see that we can produce more TVs using the same amount of resources.

 

Also PPC can shift to the left

 

 

and to the right.

 

 

The causes if this shifts are:

1)      Economic growth (more recourses) It will shift PPC to the right(increase).

2)      Technological changes. Also have influence on the PPC, as I sad before.

 

 

 

Economic systems and the role of the market.

Economic system is the way in which production is organized in a country or group of countries.

This term will respect to:

-          what goods and services are to be produced

-          how these goods and services are produced

-          who should receive these goods and services.

Three main types of economic systems:

1)      MARKET ECONOMY

2)      THE COMMAND OR CENTRALLY PLANNED ECONOMY

3)      MIXED ECONOMY.

 

 

1) Market economy

Resources are located by the forces of demand and supply. Decisions of allocation resources are  taken by millions of people and thousands of firms. The main point of market system is that government doesn’t participate in the market. This blocks show us a chain of  operations in market(the price mechanism at work).

 

 

 

  2)The Command or Centrally  Planned economy.

In this economic system the government has a central role in all decisions that are made. The government also control prices and amount of wages. The government develops the plan, that has to be keeping to achieve  economic growth. Goof example of this system was USSR, where government controlled whole economy and private property didn’t exist, everything was public.

3) Mixed economic system.

This system includes characteristics if both systems. There are public and private property. Decisions involve interaction between firms, labour and the government.