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Lecture one
Introduction
Any topic of study can be approached from different point of views and using methods or tools of analysis.
For example : Social :behavioural , attitude, tradition Political : political power, trade unions Economics :using resources labour human resources
What is Economics ?
Economics is the study of how people choose to use resources----behavior of individuals. uses
product and services
Resources
- Time - Knowledge - Talent - Lands - Building - Equipment
How to choose to use resources? How much of time to devote to work or a leisure ? How many pound to spend or to save ? How to combine resources to produce goods and services?
WHAT IS ECONOMICS ?
Economics addresses the collective behaviour of business and industries, governments and countries and the globe as a whole . So economic study the decision makers (household and firms) which occur in the market ( product & factor market), where the determination of interest in goods and services are the equilibrium price and quantities of goods exchanged.
Than our analysis is different in each level of economics. What are the level of economic analysis?
Level of analysis :
Macroeconomics : Studies the behaviour of the overall all economic activities/ aggregate outcomes. Micro economics : Studies the behaviour of the individual decisions. Mesoeconomics :It is a bridge between the two main economic paradigms in mainstream economics
Positive economics - an attempt to describe how the economy operates using the scientific Method. It is a descriptive study Normative economics - relies on value judgments to evaluate the overall functioning of the economy.
Positive economics
Abstraction Ceteris paribus assumption Test of model based on predictions, not assumptions
Normative economics
Interpersonal comparisons of utility are impossible Problems with the pareto optimality criterion
Imperfect information, Transaction barriers, Price distortions, The nonexistence of markets when externalities are present, Public goods, and Capital market imperfections.
Labor services are rented, not sold, Labor productivity is affected by pay and working conditions, and The suppliers of labor care about the way in which the labor is used.
Labor economics is the study of the market for one particular commodity in the economy : labor services. Where the equilibrium price is the wage that the workers receive and the equilibrium quantity is the amount of work that people do ( hours, weeks, ,effort, skill) in the economy
Because A persons labor is not something they sell in return for income. Rather , a persons job, occupation career are an important aspect of identity, self esteem, prestige, who you are? But other responds that : In today s society labor is a commodity that is traded ion markets.
True, but this doesn't reverse the fact that labor id is something bought and sold in a modern capitalist economy and whose price is set by supply and demand. Yet labor can be distinguished from other goods and services as follows:
Aspect of labor
3- stock cannot be bought and sold
Explanation
Slavery is prohibited. For various reasons, people cant sell shares in themselves, for example to finance education. Workers are differentiated by type of skill and demographic characteristics.
Consequences
Human capital investment is riskier than physical capital investment because it is non-diversifiable.
A wide variety of prices and market conditions for different labor services exist. This gives rise to a distribution of earnings.
Aspect of labor
5- the quality of labor services being supplied is often hard to measure
Explanation
Workers may simply be poor in management decisions and this may be apparent for years Employers association and unions.
Consequences
Compensation and incentive systems need to be designed appropriately
Aspect of labor
7- labor markets are highly regulated ; the exchange of labor is both highly taxed and subsidized.
Explanation
Income and payroll taxes, income support programs , work place safety legislation, immigration policy
Consequences
Government policy has important effects on labor markets
Labor economics
Economics characteristics of labor Economic system Role of labor as a factor of production Economic effect of trade unions
Economics of labor
Usage of human resources economically . How to use labor efficiently to achieve macro objectives Problem --- solutions----policies Problem oriented approaches analytical approaches
Economics a-Microeconomics
Studies decision that people and business make regarding the allocation of resources and prices of goods and services. Focuses on the demand and supply of labor that determine price levels for specific companies in specific industries. Microeconomics takes a bottoms- up approach to analyze the economy Example: Microeconomics would look at: - How a specific company could maximize its production and capacity so it could lower prices and better compete in its industry. - Unemployment in the industrial sector - Price of petrol
Economics a-Macroeconomics
Studies the behavior of the economy as a whole and not just on specific companies but entire industries and economies. Looks at the economy wide such as GDP ( Gross domestic product) and how it is affected by changes in unemployment, national income, rate of growth and price levels. Example: Macroeconomics would look at: - Macroeconomics takes a top-down approach - How a an increase / decrease in net exports would affect a nations capital account. - How GDP would be affected by unemployment rate.
Increased inflation ( macro effect ) would cause the price of raw materials to increase for a specific company/ industry; such as price of petrol ( micro) and in turn affecting the end products price charged to public ( affecting income) and thus affecting the whole economy.
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Best case scenario: Maximize our satisfaction with our limited resources, i.e. choose how to use our resources to our greatest advantage
ECONOMISE
Resources are anything which can be used to satisfy wants by producing G&S.
3 types:
3. CAPITAL machinery/equipment for manufacturing other G&Ss - expenditure on capital is capital investment
Fourth Enterprise
Q: Would the wealth & standard of living of the country increase if the Government printed more money?
The real economy is concerned with the amount of Goods & Services available to the population - E.g., shopping centres, public transport, quantity of food, number of hospital beds etc.. Whereas, money has no intrinsic value it merely enables transactions to take place it can be exchanged for G & Ss
Answer: We compare National Production on a year by year basis. However, when comparing we must take into account inflation. Therefore, economists use constant prices when comparing National production figures, i.e. The prices of one base year are applied to the output of other years
As economy grows than standard of living increases and standard of welfare increase than we end with a civilized society Standard of living: is what you own, based on wealth you own and real income. Standard of welfare: is not based on what you won , rather on the degree of entertainment and the ability to enjoy what you own.
Economic problem tries to find a way of how to allocate these scarce resources efficiently to satisfy the needs and desires as much as possible.
Business activity
The labor demand curve is downward sloping due to: a substitution effect, and a scale effect.
Substitution effect
Substitution effect - substitution of other resources for a resource that becomes relatively more expensive.
Scale effect
The scale effect associated with a wage increase involves the following steps:
Higher wages result in higher average and marginal costs of production, Leading to an increase in the equilibrium price of the product, Leading to a reduction in the quantity of the product demanded, Leading to a reduction in the use of all inputs used to produce the product.
Both the substitution and scale effects result in a reduction in the quantity of labor demanded when the wage rate rises. A change in the wage changes the quantity of labor demanded, but does not affect labor demand. Labor demand changes only if the labor demand curve shifts in some manner (as discussed below).
the demand for the product, and the prices of other resources.
An industry's demand for labor consists of the total demand for a particular type of worker in a given industry. (An industry consists of all of the firms that produce a given type of output.) An industry's labor demand curve is determined by adding together the labor demand curves for all of the firms in the industry.
The market for a given category of labor consists of all of the firms that might hire a given type of labor, regardless of the industry in which the firm operates. The market demand for labor is determined by adding together all of the industry demand for labor curves.
An increase in labor demand results in an increase in both the equilibrium wage and the equilibrium level of employment, A reduction in labor demand results in a decrease in both the equilibrium wage and the equilibrium level of employment, An increase in labor supply results in a lower equilibrium wage, but a higher equilibrium level of employment, and A reduction in labor supply results in a higher equilibrium wage, but a lower equilibrium level of employment.
upply restriction
Economists argue that workers are overpaid if their wage is above the equilibrium, Workers are underpaid if their wage is below the equilibrium wage.