Economics:

EMG 102 3 ECN

Thusitha Kumara thusitha@uwu.ac.lk, kumaratph@yahoo.com Recommended Texts: Begg, D., S. Fischer and R. Dornbusch, Economics (2003), McGraw Hill Salvatore, D. and E. Diulio, (2003), Principles of Economics, Schaums easy outlines, McGraw Hill

What is Economics
Concepts: Scarcity, Choice, incentives, opportunity cost, ceteris paribus, Utility, goods, production factors Production Possibility Frontiers Market Systems

Demand & Supply

Demand and Supply laws, functions, schedules Demand & Supply curves and movements of curves (changes of demand and supply quantities and prices)

Equilibrium
Demand and Supply together Marginal benefits and marginal costs Consumer surplus and producer surplus Effects of the changes of demand and supply

Elasticity & Efficiency

Response of the demand and supply to the change of own price, prices of substitutes and income Effects of price ceilings/ floor prices, taxation and externalities

Production
Production and cost of production Functions of production, cost and profit TP,AP and MP TC,AC and MC TR, AR and MR Short run and long run profit maximization

Market Structures
Perfect Competition Optimum level of output & welfare Monopoly Introduction to monopolistic competition and oligopoly

Introduction to National Accounting

National output and measurements Approaches of output, income and expenditure Components of GDP, GNP Per capita GDP and its importance GDP deflator Business Cycles Shortcomings of national accounting

Aggregate Demand, Supply & External Trade

Aggregate Demand Budget deficit and fiscal policy National debt External trade, balance of payments Exchange rates

Money, Banking & inflation

Money, functions of money, money multiplier Money market Banking institutions Inflation Interest rates Employment and unemployment

Introduction to Sri Lankan Economics

Composition of national economy Structural changes Major policy changes

Assessment

End Semester Exam 40 % Written assignments 20 % for each

Quizzes of 20 %

Workshops/presentations 20 %

Introduction to Economics
Definitions on what is Economics? Some concepts Production Possibility Frontiers (PPFs) Market Systems

What is Economics?
The science of dealing with the problem of scarcity Studies on how people make choices A formal definition

Is the study of how society decides what, how and for whom to produce (fundamental economic problems)

A social science, which deals with the economic behavior of the human beings

Scarcity

Unlimited wants and needs, limited resources

Wants: all the things that individual would consume if they had unlimited income and no time constraint Needs: things that are needed just to survive; food, shelter, medicine and cloth

This leads to scarcity and choices of basic economic problems

Resources

Land, Labour, Capital, Entrepreneurship

Land: any natural resource Labour: in terms of quality and quantity Capital: physical and financial Entrepreneurship: special type of skilled labour

Some Concepts

Opportunity cost

The opportunity cost of any action is the next best alternative forgone because of choosing the given action Not all the alternative, only the value of next best alternative This is related with opportunity cost One has comparative advantage if (s)he has the lowest opportunity cost This is a relative concept

Comparative advantage

Production Possibility Frontiers (PPFs)

Shows the maximum number of alternative combinations of goods and services that the society can produce in a given time

PPFs

Shows the maximum number of alternative combinations of goods and services that the society can produce in a given time Three main assumptions
1.

2.
3.

Quantity of available productive resources is fixed Factors of production are fully employed Technology is fixed

Moreover

Time is given Only two goods and services are produced

PPF
Tea (kgs) 25000 20000 15000 10000 5000 0 1000 2000 3000 *G A B C D E *H

PPF

F
4000 5000

Garment (nos)

PPF & Opportunity Cost

Tea (kgs) 25000 20000 15000 10000 5000 0 1000 2000 3000 A B C D E

PPF

F
4000 5000

Garment (nos)

Economic Systems

A set of scarce resources, a population and a social mechanism for resource allocation among competing end users
Market based system Centrally planned system Mixed

Market Based System

How the appropriate good is distributed at the right place in the correct quantity Price <invisible hand> Price

Transmits Information among consumers and producers Gives incentives Determines who gets how much

Market fails in some occasions

Market Failures
When there is no competition People of the same trade seldom meet together but the
Gas market in Sri Lanka

conversation ends in a conspiracy against the public or in some diversion to raise prices, Wealth of Nations (1776), Adams Smith

To

supply public goods and services Externalities Missing markets

Centrally Planned System

Central planner decides what, how and for whom to produce

Former Soviet Union countries

But in Reality..mixed

Non Market Institutions

State

with market failures Property rights Consumer societies (force groups) etc.

We Discussed
What is Economics? Concepts of scarcity, opportunity cost, comparative advantage PPFs Market systems