Overview
This lecture introduces basic economic concepts, including scarcity, economic systems, market mechanisms, macroeconomic indicators, and government policies affecting national and international economies.
Fundamental Economic Concepts
- Economics deals with the allocation of scarce resources to satisfy unlimited wants.
- Key questions: What to produce? How to produce? For whom to produce?
- Opportunity cost is the value of the next best alternative forgone when making a choice.
- Trade-offs are necessary because resources are limited.
Types of Economic Systems
- Capitalism: Decisions made by private individuals; resources owned privately.
- Socialism: Government controls major resources and production decisions.
- Mixed economy: Combines elements of capitalism and socialism.
Market Mechanism: Demand & Supply
- Demand: Quantity consumers are willing and able to buy at different prices.
- Law of demand: As price decreases, quantity demanded increases.
- Supply: Quantity producers are willing and able to sell at different prices.
- Law of supply: As price increases, quantity supplied increases.
- Market equilibrium occurs where demand equals supply.
- Elasticity measures responsiveness of quantity demanded or supplied to price changes.
Macroeconomic Indicators
- GDP (Gross Domestic Product) measures total value of goods and services produced.
- Economic growth is indicated by the rising GDP.
- Inflation is the general rise in price levels; deflation is the fall.
- Unemployment rate measures the percentage of people without jobs who are actively seeking work.
- Income distribution refers to how evenly income is spread within a population.
Government Economic Policies
- Fiscal policy: Government spending and taxation decisions to influence the economy.
- Monetary policy: Central bank actions (interest rates, money supply) to ensure stability and growth.
- Policies include conventional (interest rate changes) and unconventional (quantitative easing) measures.
Market Failures
- Public goods, externalities, natural monopolies, and asymmetric information can lead to inefficient market outcomes.
- Government intervention may be needed to correct these failures.
International Economics & Exchange Rates
- Exchange rate is the price of one currency in terms of another.
- Strong (appreciating) currency makes imports cheaper and exports costlier, and vice versa.
- Balance of payments records a country's economic transactions with the rest of the world.
Key Terms & Definitions
- Scarcity — Limited nature of resources relative to unlimited wants.
- Opportunity cost — Value of the next best alternative forgone.
- Elasticity — Sensitivity of demand or supply to changes in price.
- GDP (Gross Domestic Product) — Total market value of final goods and services in a country.
- Inflation — Sustained increase in the general price level.
- Fiscal Policy — Government spending and taxation actions.
- Monetary Policy — Central bank regulation of money supply and interest rates.
Action Items / Next Steps
- Review key formulas: GDP = C + I + G + (X−M), Elasticity calculations.
- Read assigned textbook chapters on market mechanisms and macroeconomic indicators.
- Prepare examples of opportunity cost and market equilibrium for class discussion.