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Nature and Scope of Economics Nature and Scope

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					        Nature and Scope of
            Economics
                  Dr. Aneel SALMAN
Department of Management Sciences and Humanities
GIK Institute of Engineering Science and Technology
  Every field of study has its own
            terminology

  Mathematics
         integrals
axioms                      Psychology
            vector spaces
                                       ego
                             id
                                   cognitive
           Law                    dissonance
 torts    Promissory
             note
     venues
 Every field of study has its own
           terminology

          Economics
          Opportunity     Elasticity
 Supply
             cost
                  Consumer
Comparative
                   Surplus
 advantage
                         Deadweight
              Demand        loss
          Economic Systems
•   Capitalism
•   Socialism
•   Mixed Economy
•   Islamic Economy
    Basic economic concepts

• Scarcity and Choice

• Opportunity cost
            Human wants

• Unlimited wants
                Resources
• used to produce goods / services to satisfy
  human wants

• limited in supply

• scarce: i.e. their quantities are insufficient
  to satisfy all human wants
         Types of resources
• Natural resources: e.g. sunshine, rain,
  crude oil

• Human resources: labour service

• Man made resources: e.g. machines,
  equipments
                Scarcity
• Meaning: Resources are insufficient to
  satisfy ALL human wants

• A relative concept: we want more than we
  have

• Basic economic problem in human
  societies
 Do they face scarcity problem?
• United States

• Pakistan

• North Korea

• Africa
         Is sea water scarce?
• Is it fixed in supply?

• Do we want more sea water than we have?

• Sea water is not scarce
           Are they scarce?
• Sunshine in Thailand

• A free sample of candies given at a shopping
  centre

• Fresh air in a café with many smokers

• Sand in the desert
           Are they scarce?
• Sunshine in Thailand 

• A free sample of candies given at a shopping
  centre 

• Fresh air in a café with many smokers 

• Sand in the desert   
              Competition
• We compete for the use of limited
  resources

  – 2 ways of competition
  – Price competition
  – Non price competition e.g. waiting,
    examination, lucky draw, violence…
             Making choices
• Which restaurant will you go for lunch?

• What would you like to study at university?

• What will you buy with Rs1000? DVD or dress ?

• Which girl (boy) will you marry?
        What is economics?
• It studies how we allocate the limited
  resources to satisfy unlimited wants
           Opportunity cost

• Opportunity cost is the highest-valued
  option forgone
      Choice among options

• Rank options according to a person’s
  preference order

• Option 1 going to cinema
• Option 2 going to restaurant
• Option 3 sleeping at home
 What is the cost of going to the
            cinema?

• Going to restaurant (highest-valued option
  forgone)

• We cannot choose option 2 and option 3
  at the same time, we only forgo option 2
  when we select option 1
                   Full cost
• Option 1 going to a 1 hour concert and pays
  Rs 200 for a ticket
• Option 2 working in Park’n as a salesman
  earning Rs 30 per hour
• Option 3 working as a tutor earning Rs100 per
  hour
• Full cost of attending the concert = price of ticket
  + income forgone (highest-valued option forgone)
• Full cost of attending the concert = Rs 200 + Rs
  100 = Rs 300
        Complimentary tickets
•   Going to Cinepax
•   Ticket : Free of charge
•   Money spent on food, transport.= Rs 200
•   Income forgone = Rs 500

• Full cost of going for Disneyland = Rs 700
             Is Time a cost?
•   Price of a mobile phone = Rs 1 800
•   Search = one evening
•   Income forgone while searching = Rs 200
•   Opportunity cost of buying the mobile
    phone is Rs 2 000
                Uses of a flat
• Mrs Balqees has the following options for her flat
  in Topi :

• Option 1     Owner occupied
• Option 2     Vacant
• Option 3     Lease with a rental income Rs 50
  000 per year

• Suppose she chooses to live in her flat, what is
  her cost of living in that flat?
               Social Cost
• Building a new railway $100 million
• Creating pollution nearby (e.g. cutting
  trees, noises)          $5 million

• Social cost of building highway = private
  cost + external cost = $105 million
                Question
Asad could spend two hours at a concert or
tutoring a student at $70 per hour. He could use
the time on painting instead and earn a total of
$170. If the price of the concert ticket is $250,
what is the opportunity cost of his choice of
going to the concert?

A   $ 410
B   $ 420
C   $ 430
D   $ 440
                      Question
Maryum has accumulated           No. of coupons Gifts
20 Coupons. What is the
opportunity cost to her if she   5              Cup
uses them to exchange for        15             Bag
one camera?                      20             Camera

A. Cup
B. Bag
C. Cup and Bag
D. Cup or Bag
                Question
Which of the following statements about
   scarcity is true?
A. Once a choice is made, the problem of
   scarcity is solved.
B. A good is scarce if not everyone has it.
C. Scarcity means unlimited human wants.
D. Both rich people and poor people face
   the problem of scarcity.
                  Question
• Which of the following are opportunity costs of
  attending school?
(1) Poor examination results
(2) Income forgone
(3) School fees
(4) Expenditure on dinners

A. (1) and (4)
B. (1) and (3)
C. (2) and (3)
D. (2) and (4)
       Answers

1. B
2. C
3. D
4. C
          Economic Models
• Economists use models to simplify reality
in order to improve our understanding of the
world
• Two of the most basic economic models
include:
  • The Circular Flow Model
  •The Production Possibilities Frontier
     The Circular-Flow Model

• The circular-flow model is a simple
  way to visually show the economic
  transactions that occur between
  households and firms in the economy.
  The Circular-Flow Diagram
        Revenue                      Spending
                    Market for
                      Goods
      Goods &                        Goods &
    Services sold   and Services
                                     Services
                                     bought


Firms                                        Households


    Inputs for                      Labor, land,
    production       Market for     and capital
                       Factors
  Wages, rent,      of Production      Income
   and profit
    The Circular-Flow Diagram
                 Firms
• Produce and sell goods and services
• Hire and use factors of production

             Households
• Buy and consume goods and services
• Own and sell factors of production
      The Circular-Flow Diagram
       Markets for Goods & Services
•   Firms sell
•   Households buy
      Markets for Factors of Production
•   Households sell
•   Firms buy
    The Circular-Flow Diagram

         Factors of Production
• Inputs used to produce goods and
  services
• Land, labor, and capital
         Microeconomics and
          Macroeconomics
• Microeconomics focuses on the individual
  parts of the economy.
  • How households and firms make decisions
    and how they interact in specific markets
• Macroeconomics looks at the economy as
  a whole.
  • How the markets, as a whole, interact at the
    national level.
                  Question
• Indicate whether each of the following
  statements applies to microeconomics or
  macroeconomics:
  a. The unemployment rate in Pakistan was 9.2
  percent in January 2005.
  b. A U.S. software firm discharged 15 workers
  last month and transferred the work to India.
  c. An unexpected freeze in Sargodha reduced
  the citrus crop and caused the price of oranges
  to rise.
              Question
d. Pakistani output, adjusted for inflation,
grew by 3.5 percent in 2009.
e. Last week Bank Alfalah lowered its
interest rate on business loans by one-half
of 1 percentage point.
f. The consumer price index rose by 3.4
percent in 2008.

				
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posted:4/16/2012
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