Gsb728 lecture note topic 1

Economics for Management

GSB728

Topic 1:

Alternative Value Systems and Basic Concepts in Economics

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Note: This lecture note was prepared based on the teaching material provided

by the publisher of the textbook Principles of Economics.

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Learning Objectives

1. Value Systems.

2. The economic problem: What is economics all about?

3. What is meant by ‘macroeconomics’ and ‘microeconomics’?

4. Modelling economic relationships: How can diagrams be used to illustrate economic issues?

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Value Systems

• How do we value things?

– Individuals place different values on goods, services and assets depending on their personal preferences and circumstances.

– Societies need a system for valuing things.

– Different Value Systems include:• Traditional Value Systems (prices set by monarchs).

• Labour Value Systems (prices set by gov. based on L).

• Scarcity or Market Value Systems.

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The Economic Problem

• What is economics all about?

– Production and consumption: Satisfying human needs with available resources.

– Scarcity is the central economic problem: Potentially unlimited human needs and limited resources.

– Demand and supply: Help solve scarcity by reconciling resources and needs.

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What is Macroeconomics?• Macroeconomics is the branch of economics that

studies economic aggregates (grand totals).– Examples: the overall level of prices, output and

employment in the economy.

• Macroeconomic issues: - Managing demand and supply aggregates.

- Encouraging national economic growth.

- Minimising inflation.

- Managing the balance of trade.

- Managing cyclical economic fluctuations.

- Minimising unemployment.

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• Microeconomics is the branch of economics that studies individual units (e.g.: households, firms and industries).

• Microeconomic issues:– The choices to be made:

• What to produce?• How to produce?• For whom to produce?

– Recognise the Opportunity Cost (cost of any activity measured in terms of the best alternative forgone).

– Making Rational Decisions (Benefits vs. Opportunity Costs).

– Marginal Benefits vs. Marginal Costs (of doing an extra unit).

– The social implications of choice (consequences).

What is Microeconomics?

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Modelling Economic Relationships: Production Possibility Curve

• Diagrams:– Represent ‘models’ in economics.– Illustrate basic economic

relationships.– Simplify and explain economic issues.

• Production possibility curve (PPC):

- A fundamental economic ‘model’.

- Illustrates society’s production choices.

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Production Possibility Curve

Derivation of a Production Possibility Curve

00.1

0.2

0.3

0.4

0.5

0.600000000000001

0.700000000000001

0.8

0.9

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

22.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

33.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

44.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

55.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

66.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

77.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

80

1

2

3

4

5

6

7

8

Units of clothing (millions)

Un

its o

f foo

d (

mill

ion

s)

Units of food Units of clothing (millions) (millions)

8.0 0.0 7.0 2.2 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0

A Production Possibility Curve

10Source: Sloman et al. (2014).

00.1

0.2

0.3

0.4

0.5

0.600000000000001

0.700000000000001

0.8

0.9

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

22.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

33.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

44.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

55.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

66.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

77.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

80

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2

3

4

5

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7

8

Un

its o

f foo

d (

mill

ion

s)


a 8.0 0.0 7.0 2.2 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0

a

Units of clothing (millions) 11

A Production Possibility Curve (contd.)

Source: Sloman et al. (2014).

00.1

0.2

0.3

0.4

0.5

0.600000000000001

0.700000000000001

0.8

0.9

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

22.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

33.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

44.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

55.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

66.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

77.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

80

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2

3

4

5

6

7

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8.0 0.0b 7.0 2.2 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0

b

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Un

its o

f foo

d (

mill

ion

s)




00.1

0.2

0.3

0.4

0.5

0.600000000000001

0.700000000000001

0.8

0.9

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

22.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

33.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

44.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

55.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

66.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

77.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

80

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2

3

4

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7

8

Un

its o

f foo

d (

mill

ion

s)


8.0 0.0 7.0 2.2c 6.0 4.0 5.0 5.0 4.0 5.6 3.0 6.0 2.0 6.4 1.0 6.7 0.0 7.0

c

Units of clothing (millions) 13



00.1

0.2

0.3

0.4

0.5

0.600000000000001

0.700000000000001

0.8

0.9

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

22.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

33.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

44.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

55.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

66.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

77.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

80

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2

3

4

5

6

7

8

Un

its o

f foo

d (

mill

ion

s)

x

w


A Production Possibility Curve [Figure 1.1]


(Efficient)

(Impossible)

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Modelling Economic Relationships

• Economists use diagrams and equations as tools to illustrate economic issues.

• These tools are called ‘models’.

• The production possibility curve (PPC) is a specific economic model.

• The PPC shows all possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.

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• We can use diagrams to illustrate economic issues!!

– Microeconomics and the PPC:

• Choice creates opportunity cost.

• Opportunity cost increases.

– Macroeconomics and the PPC:

• Production within the curve.

• Shifts in the curve

Modelling Economic Relationships (contd.)

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Opportunity Cost and the PPC

00.1

0.2

0.3

0.4

0.5

0.600000000000001

0.700000000000001

0.8

0.9

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

22.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

33.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

44.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

55.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

66.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

77.1

7.2

7.3

7.4

7.5

7.6

7.7

7.8

7.9

80

1

2

3

4

5

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7

8

Un

its o

f foo

d (

mill

ion

s) x

y

Z


Increasing Opportunity Costs [Figure 1.2]

1

12

1


3

1

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Resource Use and the PPC

V

X

Y

O

Foo

d

Clothing

Production inside theproduction possibility curve

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Making a Fuller Use of Resources [Figure 1.2]


(Efficient)

(Efficient)

(Inefficient)

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Shifts in the PPC

O

Foo

d

Clothing 22Source: Sloman et al. (2014).

Growth in Actual Output

O

Foo

d

x

Clothing

x1


Growth in Actual Output (contd.)

O

Foo

d

Clothing 24Source: Sloman et al. (2014).

Growth in Potential Output [Figure 1.4]

O

Foo

d

Clothing

Now

5 years time

x

x1


Growth in Potential Output [Figure 1.4] (contd.)

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Modelling Economic Relationships: Circular Flow of Goods and Income

• The circular flow of goods and incomes:

– Firms and households.

• Money flows from households to firms while goods and services flow from firms to households.

• In addition, firms pay money to households to use factors of production owned by households (labour, land and capital).

– What is a market?• Interaction between buyers and sellers (could be on street

market, shop, internet, etc.)

– Goods markets:

• Real flows: goods and services

Goods & services

Circular Flow of Goods and Incomes - I


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• The circular flow of goods and incomes:– Firms and households

– What is a market?

– Goods markets:

• Real flows: goods and services

• Money flows: consumer expenditure

Circular Flow of Goods and Incomes (contd.)

Goods & services

$Consumerexpenditure

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Circular Flow of Goods and Incomes - II


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• The circular flow of goods and incomes:– Firms and households.


– Goods markets:

• Real flows: goods and services.

• Money flows: consumer expenditure.

– Factor markets:

• Real flows: services of labour and other factors.


Goods & services

$Consumer

expenditure

The services of the factors of production

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Circular Flow of Goods and Incomes - III


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• The circular flow of goods and incomes:– Firms and households.


– Goods markets:

• Real flows: goods and services.

• Money flows: consumer expenditure.

– Factor markets:

• Real flows: services of labour and other factors

• Money flows: wages and other incomes.


Goods and services

$Consumerexpenditure

The services of the factors of production

Wages, rent,dividends, and so on

$

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Circular Flow of Goods and Incomes – IV [ Figure 1.5]


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• The circular flow of goods and incomes:

– Macroeconomic issues:• The size of total flows.

– Microeconomic issues:• Individual markets.

• Composition of the circular flow: Choices made in markets of goods and factors (specific goods and factors traded).


References

Morales, L. E., Simons, P. and Valle de Souza, S. (2014). GSB728: Economics for Management [Topic Notes]. Armidale, Australia: University of New England, Graduate School of Business.

Sloman, J., Norris, K and Garratt, D. (2014). Principles of Economics (4th ed.). French Forest, Australia: Pearson.

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Technology

Gsb728 lecture note topic 1