ESSENTIALS OF ECONOMICS Zhong Huiyun,McGraw-Hill/Irwin,Copyright 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.,Introduction to the teacher,Doctor of Economics, major in international trade Master of Economics, major in western economics Bachelor of Arts, major in English Tel:Introduction to this course,Purpose Grasp some basic economic concepts、theory and methods Understand some economic phenomenon Lay a basis for your further business study,Evaluation,Middle-test. 30% Final-test. 50% Presence and class behavior. 20%,Requirement,Pre-study Exercise Attendance,Chapter 1 The Challenge of Economics,The Central Problem of Scarcity,Our materialistic wants and desires continue to grow Newest camera phone Larger TV Bigger home More exotic vacation Why cant we have everything we want? Our wants exceed our resources.,LO-1,Economics and Opportunity Cost,Economics The study of how best to allocate scarce resources among competing uses. Opportunity Cost The most desired goods and services that are foregone in order to obtain something else. The next best alternative that you give up.,LO-2,Factors of Production,Resource inputs used to produce goods and services. The four resources: Land, labor, capital, and entrepreneurship. Land including natural resources Labor number and skills of workers Capital machinery, buildings, networks Entrepreneurship skill in creating products, services, and processes Scarcity means we lack available resources to satisfy our output desires.,LO-2,Three Basic Economic Questions,WHAT to produce HOW to produce FOR WHOM to produce,LO-3,WHAT to Produce,Our wants exceed our resources. We have to decide what we want most. We have to sacrifice less desired activities and goods.,LO-3,Production Possibilities,How much we could produce depends on how many resources are available. Production possibilities The alternative combinations of goods and services that could be produced in a given time period with all available resources and technology.,LO-3,Production Possibilities Curve,LO-3,The Choices Nations Make,A nation must choose what to do with its scarce resources during war or periods of military buildup. Produce military goods (“guns”) or consumer goods (“butter”)? Every time we increase missile production, house construction must be reduced.,LO-3,Investment and Economic Growth,Investment Expenditures on (production) of new plant and equipment (capital) in a given time period. Economic growth An increase in output (real GDP). An expansion of production possibilities outward.,LO-3,Investment and Economic Growth,HOW to Produce,The second economic goal for every society is to find an optimal method of producing goods and services.,LO-3,FOR WHOM to Produce,The “for whom” question focuses on how an economys output is distributed across members of society.,LO-3,FOR WHOM to Produce,The economic pie can be divided in several ways:,Distribution based on productive contributions. Distribution based on need. Some combination of productive contributions and need.,LO-3,Incentives,Distribution based on need rather than work effort may result in less work effort. There is less output to distribute. The size of the pie may get smaller.,LO-3,The Mechanisms of Choice,Every society has to make choices about what, how and for whom to produce. There are conflicts and tradeoffs with every choice.,LO-4,The Market Mechanism,Market sales and prices send a signal to producers about what mix of output consumers want. Market sales and prices convey the message and direct the market, much like an “invisible hand”.,LO-4,The Market Mechanism,Laissez faire is the doctrine of “l(fā)eave it alone,” or non-intervention by government in the market mechanism. This concept is associated with Adam Smith.,LO-4,Central Planning,The government decides what goods are produced, at what prices they are sold, and who gets them. This concept is associated with Karl Marx.,LO-5,Mixed Economies,Economies that use both market and non-market signals to allocate goods and resources. This represents a combination of the other two systems. Most nations today are mixed economies.,LO-5,Undesirable Choices,Why dont we let the market make all our output decisions? Markets dont always produce the “right” amount of output. Market Failure,LO-5,The Wrong Mix of Output,Market failure means that the market does not produce the best possible mix of output. The market might produce too much of some products and too little of other products. The market might fail to make full use of the economys production possibilities.,LO-5,The Wrong Mix of Output,M (market outcome),N (recession),X (optimal mix),O,OUTPUT OF CONSUMER GOODS (units per year),OUTPUT OF MILITARY GOODS (units per year),Government Failure,Government will not necessarily offer better answers to the WHAT, HOW, and FOR WHOM questions. Government intervention that fails to improve economic outcomes.,LO-5,Government Failure,Government intervention might worsen the mix of output. It might even reduce the total amount of output through over-regulation. There is no guarantee that the visible hand of government will be any cleaner than the invisible hand of the marketplace.,LO-5,Government Failure,M (market outcome),G1,G2,X (optimal mix),O,OUTPUT OF CONSUMER GOODS (units per year),OUTPUT OF MILITARY GOODS (units per year),Government intervention doesnt always improve economic outcomes,What Economics Is All About,A combination of market