(This lecture was first given at the National Economics University, Hanoi, Viet Nam.)
A. How do people choose what to buy and how to produce?
B. Why are some peoples incomes higher than others?
C. Why is there unemployment?
D. Why is there inflation?
E. What happens when nations link their economies?
F. Why are some nations wealthier than others?
G. What should be the economic role of the Government?
A. Scarcity means:
There are not enough resources available to produce as much as people want.
Without scarcity there are no economic problems.
B. Economics is:
The study of how people manage their limited resources to try to deal with the problem of scarcity.
C. Because resources are scarce, people must make choices.
1. Economists assume that people make choices by optimizing.
Comparing costs and benefits and selecting best option.
D. All choices involve opportunity costs.
The opportunity cost of taking one action is the best alternative outcome forgone.
E. The opportunity cost of a good includes what you could have done with the time spent acquiring a good.
F. From society's point of view the opportunity cost includes external costs.
External costs are: costs paid by someone who is no a party to the transaction.
G. Scarcity leads to competition and cooperation.
A. An economy can be defined as:
A social device consisting of decision makers and coordinating mechanisms that allocate resources and answer three questions, what to produce, how to produce and for whom to produce.
B.Decision makers are:
Economic entities that make choices
The principal decision makers can be classified as households, firms and governments
C. Markets are:
Economic arrangements that facilitate buying and selling
Three major types of markets are:
(Goods markets, Factor Markets, Financial Markets)
1. Goods markets
Goods include both physical gods and non- physical services
2. Factor markets
Factors refer to productive resources
For convenience productive resources are classified as labor, land and capital.
When used in economic textbooks these words have very specialized meanings. Those meanings are quite different from the ordinary meanings. Hence:
Labor means:
Land means:
Capital means:
3. Financial Markets
D. There is a possibility that choices of decision makers may conflict with each other.
e.g. Amount of rice farmers wish to grow amount of rice people of Ha Noi wish to consume.
E. There are three major ways of achieving coordination. They are: Central Planning, Markets, Custom and Tradition.
In all countries of the world all three coordination mechanisms are used but their relative importance is unique to each country.
F. In a Market Economy, the three basic questions are resolved by changes in market prices.
1. What to produce?
If there is a shortage, prices will rise. Producers will have an incentive to produce more and consumers will have an incentive to produce less.
2.How to Produce?
Producers have an incentive to use the least expensive inputs and the most efficient methods.
3. For Whom to produce?
The persons with the high incomes will be able to purchase more than people with low incomes.
G. In a Centrally Planned economy, these decisions are made by planners and implemented by detailed instructions from higher to lower levels.
H. Economies may be closed or open.
A closed economy does not engage in transactions with other economies. And open economy does deal with other countries.
A. Economics can be subdivided in a number of ways. e.g
1. Positive versus Normative
2. Macroeconomics vs. microeconomics
B. Positive and Normative statements
1. A positive statement attempts to describe the world as it actually is.
A positive statement is subject to testing and can be refuted.
2. A normative statement attempts tell how the world should be.
Normative statements depend on value judgements and cannot be tested or proven true or false.
C. Positive Economics consists of facts and theories.
An economic theory is a rule that allows us to understand and predict people's economic choices.
D. Economic theory consists of economic models. Economic models consist of assumptions and implications.
1. Assumptions describe what is important and what can be ignored.
2. Economic models often make the following assumptions.
a. People have preferences
b. People have a fixed endowment of resources and a given technology for transforming resources to output.
c. People economize
d. People's choices are coordinated.
3. Implications are the results of the model. Usually they are the equilibrium values of the variables.
An equilibrium is a situation where everyone has optimized and the individual choices are coordinated with each other.
E. Economic Theory can be subdivided into microeconomics and macroeconomics.
1. Microeconomics is a study of the decisions of individual households, firms, and governmental units. It examines the way individual markets work.
2. Macroeconomics is a study of the economy as a whole. It is concerned with aggregate output, the unemployment rate and the inflation rate.