Intro to Economics (ECS1500) 01 - The Economic Environment

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ECS1500Foundations of Economics

Errol Goetsch 078 573 5046 [email protected] 082 770 4569 [email protected]

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Boston | UNISA 2015Unit 1 – Introduction to the Economic Environment

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1 – Introduction01 The Economic Tool-kit02 Market Types

2 – Price determination03 Flow of Funds04 Supply, Demand, Prices05 Changes in Supply and Demand

3 – 3 important sectors06 The Public Sector07 The Financial Sector08 The Foreign Sector

4 – Measurement of the Economy09 The Inflation, Unemployment, Economic Growth

1.1 Introduction1.2 The Basic Economic Problem1.2.1 Scarcity1.2.2 Unlimited wants vs. limited means1.2.3 Factors of Production1.2.4 Choice and Opportunity Cost1.3 The Miracle of the Market Economy1.3.1 Markets1.3.2 Prices1.4 Common market failures1.5 Macro vs. Micro economics1.6 Macroeconomic objectives1.7 Measurement of Production1.7.1 The importance of national accounts1.7.2. Gross domestic product1.7.3 Double counting and avoiding it1.7.4 3 ways to calculate GDP1.8 Real vs. Nominal values1.9 The composition of GDP1.9.1 Origin of GDP1.9.2 Components of Total Expenditure1.10 Shortcomings of GDP

Lecture OutcomesUnits 1 - 10

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1.1 IntroductionThe circular flow of goods and services

Firm

Factor Market

Household

Goods Market

Sell Buy

Buy Sell

Make

Use

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1.2 The Basic Economic ProblemHow, what, for whom

Sell Buy

Buy Sell

Make

Use

What (should be produced)?

How (should goods and services be

produced)?

For whom (should the goods and

services be produced)?

Firm

Factor Market

Household

Goods Market

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1.2.1 ScarcityDefinition of Economics

Sell Buy

Buy Sell

Make

Use

In Economics we study how people use their limited resources to gain the

greatest possible satisfaction of their unlimited needs

Firm

Factor Market

Household

Goods Market

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1.2.2 ScarcityUnlimited wants vs. limited means

Sell Buy

Buy Sell

Make

Use

Limited means

Factors of Production

The Economic Problem: Scarcity We have near-infinite needsWe have fixed supplies in short termWe have finite supplies in long termIf S > D then scarcity of DemandIf D > S then scarcity of Supply

Unlimited wants

(wishes vs. necessities)

In Economics we study how people use their limited resources to gain the

greatest possible satisfaction of their unlimited needs

Means of Production Firm

Factor Market

Household

Goods Market

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1.2.3 Factors of ProductionNatural, human and man-made resources

Sell

Buy

Make

Use

Factor Market

Household

Firm

Natural Resources(mineral, agricultural, marine)Human ResourcesMental and physical capacityMan-made resourcesMachines, equipment, tools

LabourCapital goodsLandEntrepreneurship

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1.2.4 Choice and Opportunity Cost1.1.2 Choice and Opportunity Cost

Sell Buy

Buy Sell

Make

Use

Scarcity requires choosing between optionsChoice = Opportunity Costmeasures the cost of obtaining (producing) a certain quantity of a good in terms of anothergood (or goods) that could havebeen obtained (produced) in its place

Firm

Factor Market

Household

Goods Market

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1.3 The Miracle of the Market EconomyDefinition

Sell Buy

Buy Sell

Make

Use

A market economy is an elaborate mechanism for the unconscious

coordination of people, activities and businesses through a system of prices

and markets

Factor Market

Household

Goods Market

Firm

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1.3 The Miracle of the Market Economy1.3.1 Markets and 1.3.2 Prices

Sell Buy

Buy Sell

Make

Use

Prices are the value of goods in terms

of money

Supply / Demand

Supply / Demand

Supply / Demand

Supply / Demand

EquilibriumDemand = Supply

Factor Market

Household

Goods Market

Firm

Labour MarketCapital market

Property marketStock market

Wholesale Market

Retail MarketFinancial Market

etc

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1.4 Common Failures of the MarketSocially non-optimal outcomes

Imperfect competition(monopolies, oligopolies and

weak property rights)Asymmetric Information

Buyer (or Seller) knows more than Seller (or Buyer)

Public goodsGoods or services that

cannot be sold to a person

Factor Market

Household

Goods Market

Firm

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1.5 Microeconomics vs MacroeconomicsDistinguishing the 2 main areas of study in Economics

Factor Market

Household

Goods Market

Firm

Micro – small

the Prices and Quantities of specific

goods in individual markets and

determine changes

price theory and decisions to buy and

sell

Macro – bigstudy the economy as a whole, looking at global economic magnitudes,

such as total production of a country, total

employment, inflation rate etc.

Govt. stabilisation policies of fiscal and

monetary policy

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1.6 Macroeconomic ObjectivesThe responsibility of Government when faced with aggregates

Factor Market

Household

Goods Market

Firm

1. Full employment2. Price Stability3. External Equilibrium4. Economic growth5. Equitable income

Macro – bigstudy the economy as a whole, looking at global economic magnitudes,

such as total production of a country, total

employment, inflation rate etc.

Govt. stabilisation policies of fiscal and

monetary policy

12

4

5

3BoP

ER3

BoP

ER

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1.7 The Measurement of ProductionThe parts of the National Accounts

Factor Market

Household

Goods Market

Firm

12

4

5

Macro


1. Employment Rate2. Inflation3. Exchange rate4. GDP5. Gross Natl Income5. Gross Dom Expenditure5. Disposable IncomeGross / Net capital formation

3BoP

ER3

BoP

ER

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1.7 The Measurement of Production1.7.1 The importance of the SARB's National Accounts

Factor Market

Household

Goods Market

Firm

12

4

5

Macro


1. Employment Rate2. Inflation3. Exchange rate4. GDP5. Gross Natl Income5. Gross Dom Expenditure5. Disposable IncomeGross / Net capital formation

GDP = R final production of the economyGDE R

expenditure of the economy

GNI total income of households

PPI

GDP

GNI

UR

GC / LR

3BoP

ER3

BoP

ER

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1.7 The Measurement of Production1.7.2 Gross domestic product defined, and 1.7.3 Double counting

Sell Buy

Buy SellThe total value of all final goods and services produced within the boundaries of a country during a certain period (normally a year)- using their market prices- excluding intermediate goods to avoid double counting

Factor Market

Household

Goods Market

Firm

Intended Intermediate goods

Final goods

1 Farmer 10 0002 Miller 12 5003 Baker 18 0004 Shop 21 0005 Total 61 500

Any commodity or service bought for reselling or processing is an intermediate and is not counted in GDP

Final goods produced (not just sold or on stock exchange)

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1.7 The Measurement of Production1.7.4 3 methods to calculate gross domestic product

Sell Buy

Buy SellEquality of national income accountsProduction methodValue added to basic prices=Expenditure methodMarket prices of final outputs=Income method Payments for factors in production

Factor Market

Household

Goods Market

Firm

Intermediate Goods

Final goods

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1.7 The Measurement of Production1.7.4 Expenditure method to calculate GDP

Factor Market

Household

Goods Market

Firm

1 Farmer 10 0002 Miller 12 5003 Baker 18 0004 Shop 21 0005 Final 21 000Expenditure Method

Counting value of goods and services at final stage i.e. when sold to consumer

Intermediate Goods

Final goods

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1.7 The Measurement of Production1.7.4 Production method to calculate GDP

Factor Market

Household

Goods Market

Firm

Final goods

1 Farmer 10 0002 Miller 2 5003 Baker 5 5004 Shop 3 0005 Total 21 000Production Method

Counting value added to goods and services at each stage

Intermediate Goods

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1.7 The Measurement of Production1.7.4 Income method to calculate GDP

Factor Market

Household

Goods Market

Firm

1 Wages 11 0002 Rent 3 5003 Interest 3 5004 Profit 3 0005 Total 21 000Income Method

Counting payments to factors of production across all stages

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1.8 Real vs. Nominal ValuesReal value = Nominal value - Inflation

Factor Market

Household

Goods Market

Firm

2013 – 2010 2010 x 100

2010 2011 2012 2013 2010 Base1 Apple R1 1.1 1.2 1.3 30%1 Bottle R5 5.2 5.3 5.5 10%1 Cloth R1 1.1 1.3 1.3 30%1 Duster R3 3 3.1 3.2 6.6%4 Total 10 10.4 10.9 11.3 11.3%

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1.9 Composition of the GDP1.9.1 Origin of the GDP

Factor Market

Household

Goods Market

Firm

Natural Resources(mineral, agricultural, marine)Human ResourcesMental and physical capacityMan-made resourcesMachines, equipment, tools

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1.9 Components of total expenditureY = C + I + G + (Net Exports)

Factor Market

Household

Goods Market

Firm

Y = total expenditure =C (final consumption by Households)+ I (Gross capital formation)+ G (final consumption by Government)= Gross Domestic Expenditure+ X (exports of goods and services)- Z (imports of goods and services)= Expenditure on GDP

C

I

G

X

Z

Z

X

GDE = C + I + GGDP = C + I + G + X – ZGDP = GDE + X - ZIf GDP > GDE, X – Z > 0, X > Z i.e. trade surplus if GDP < GDE, Y > Z > 0, X < Zi.e. trade deficit

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1.9 Components of total expenditureY = C + I + G + (Net Exports)

C (consumption)normally the largest GDP component in the economyprivate (household final consumption) expenditure in the economyDurable goods, non-durable goods, and services. e.g. food, rent, jewellery, gasoline, and medical expensesNot include purchase of new housing

I (investment) business investment in equipmentnot include exchanges of existing assetse.g. construction of a new mine, purchase of software, or purchase of machinery and equipment households (not government) purchases on new houses (buying financial products is classed as 'saving', as opposed to investment)

G (government spending) sum of government expenditures on final goods and servicese.g. salaries of public servants, purchases of weapons, any investment expenditure not include any transfer payments, such as social security or unemployment benefits.

X (gross exports)

Z gross (imports)

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1.10 Shortcomings with GDPGDP is not a perfect measure of economic activity

Factor Market

Household

Goods Market

Firm

C

I

G

X

Z

Z

X

Incomplete and inaccurateNot count off-market goods / servicesNot count unrecorded activities (informal sector)Not count leisure timeCounts waste as valuableNot count externalitiesNot recognise sustainability

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1 – Introduction01 The Economic Tool-kit02 Market Types

2 – Price determination03 Flow of Funds04 Supply, Demand, Prices05 Changes in Supply and Demand

3 – 3 important sectors06 The Public Sector07 The Financial Sector08 The Foreign Sector

4 – Measurement of the Economy09 The Inflation, Unemployment, Economic Growth

1.1 Introduction1.2 The Basic Economic Problem1.2.1 Scarcity1.2.2 Unlimited wants vs. limited means1.2.3 Factors of Production1.2.4 Choice and Opportunity Cost1.3 The Miracle of the Market Economy1.3.1 Markets1.3.2 Prices1.4 Common market failures1.5 Macro vs. Micro economics1.6 Macroeconomic objectives1.7 Measurement of Production1.7.1 The importance of national accounts1.7.2. Gross domestic product1.7.3 Double counting and avoiding it1.7.4 3 ways to calculate GDP1.8 Real vs. Nominal values1.9 The composition of GDP1.9.1 Origin of GDP1.9.2 Components of Total Expenditure1.10 Shortcomings of GDP

Lecture OutcomesUnits 1 - 10

Intro to Economics (ECS1500) 01 - The Economic Environment

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Transcript of Intro to Economics (ECS1500) 01 - The Economic Environment