Basic concepts, relationships and issues

what economics is all about
1. Macroeconomic theory
  1. aka a model
  2. how
    1. simplification and abstraction
      1. systematic attempt to understand complex issues
      2. identify most nb elements and relationships, ignore the rest
  3. why
    1. explain complex phenomenon
    2. predict
    3. formulate decisions (economic policy)
2. 5 objectives of Macroeconomic policy
  1. ECONOMIC GROWTH
    1. aim to match production to population living stds needs and employment
  2. FULL EMPLOYMENT
    1. unemployment is threat to society and is costly
      1. increased production doesn't always equal increased employment, but is needed if going to raise
  3. PRICE STABILITY
    1. inflation
      1. keep low
    2. responds to changes in supply and demand
    3. CPI
  4. BALANCE OF PAYMENT STABILITY
    1. aka external stability
    2. imports and exports
      1. aim to earn foreign currency through exports
        balance of payments and exchange rates should be stable
  5. EQUITABLE DISTRIBUTION OF INCOME
    1. socially acceptable
      1. reduce social and political unrest
  6. HOW?
    1. monetary policy
    2. fiscal policy
3. Definition of economics:
  1. wants are unlimited but means to satisfy are limited. Scarcity necessitates choice
    1. Definition opportunity cost: value of alternate decision
  2. seeks to explain, analyse and predict eg economic growth, inflation, unemployment
  3. micro vs macro
    1. micro isolated from rest of economy - households, firms study of decisions, demand/supply and prices.
    2. macro whole economy. Aggregate (total eg total production, income and expenditure, economic growth, emplyment)
The mixed economy
1. Total production, income and spending in the mixed economy
  1. 3 major flows
    1. PRODUCTION
      1. aim: consume. satisfy wants
      2. generated by factors of production
        land
        quality and quantity nb
        labour
        income as reward
        human capital
        capital
        entrepeneurs
    2. sequence: production > creates income> used to purchase products
      1. all steps simultaneous
    3. INCOME
      1. created in production process
        TOTAL REMUNERATION EARNED BY FACTORS OF PRODUCTION. TOTAL INCOME = TOTAL PRODUCTION
      2. TYPES
        rent
        wages and salaries
        interest
        profit
    4. SPENDING
      1. households C
      2. govt G
      3. Firms I
      4. Foreign sector X-Z
2. The relationships between households, firms, govt and foreign sector in the mixed economy
  1. CIRCULAR FLOW OF PRODUCTION, INCOME AND SPENDING
    1. HOUSEHOLD
      1. individuals, family, joint income aka consumers
        consumption: satisfy needs and wants
        aggregate consumption= all households combined: 'C"
        CIRCULAR FLOW OF GOODS AND SERVICES AND OF INCOME AND SPENDING (AKA 'MONETARY FLOW') COMBINED
        they flow in opp directions
    2. GOVT (local, regional, national)
      1. aka 'public sector'
      2. "G"
        injection into flow
      3. "T' taxes
        leakage out of flow
      4. transfer payments
      5. authority to enforce lawa
    3. FIRMS
      1. create goods using factors of production> sold in goods market to consumers
        buyers in factors market, sellers in goods market
        capital formation aka investment "I"
        injection into flow
    4. FOREIGN SECTOR
      1. open economy
      2. balance of payments: tracks flow in and out
        exports "x"
        injection
        imports "Z"
        leakage
    5. Production is created by the factors of production (natural resources, labour, capital and entrepreneurship). These factors ear income (rent, salaries, interest, profit). Spending is done by households, firms, govt and the foreign sector)
      1. C+I+G+X-Z
  2. major markets
    1. factors market
    2. goods and services
      1. tangible and intangible
    3. financial markets
      1. mechanisms allow to uy and sell financial securities, commodities at low transaction costs
3. Q: What goods, what quantities, how produced, for whom?
4. A: tradition, command, the market mixed
A few things to watch out for
1. fallacy of composition
  1. whole is not sum of parts
2. corelation and causation
  1. two events tending to occur together or in sequence doesn't mean one caused the other. Rather need a logical theory
3. definition of levels is not same as rates of change
  1. levels: the value
  2. rate of change: increase or decrease in value eg in prices 'inflation rate'
  3. base from which rate starts is nb
calculating percentages
1. what is one number (x) as a percentage of another (y)? x/y times 100
2. Calculate change between x and y as a percentage of x? y/x - 1 times 100
3. calculate the percentage of an amount ie x% of y? x/100 times y
4. find an amount after a given percentage increase ie x increased by y%? y/100 +1 times x

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	Creado por Robyn Oelofse hace más de 10 años