1 INTRODUCTION TO ECONOMICS
Four types of resources
• In order to make the goods and services, we need to have resources
• Resources are inputs into the production process
• There are four types of resources:
- Land
- Labour
- Capital
- Entrepreneur
Land
- Includes natural resources (mineral, water, steel) as well as the ground where we build factories
and buildings (called as land)
- can be divided into two categories: 1) Renewable trees and water 2) Non-renewable petroleum
- The basic payment to the owners of land is rental
Labour
- Physical and mental talents of human used in production of goods and services
- Any worker that helps in production of goods and service can be called as labour
- The amount of labour in a country depends on the population
- Example: clerk 书记, teacher, factory worker
- The basic payment to labour is wages and salaries
Capital
- “man-made” goods used to produce other goods or services
- It consists 组成 mainly of plant and equipment
- Eg: machines, factory, transportation
- Capital does not refer to money
- the payment received by capital owners is interest
Entrepreneur
- Human resource that organizes the other three resources
- The person who makes decision in a business on what to produce and how to produce
- In making decisions, the entrepreneur has to take risks
- Also an innovator introduce new products and techniques
- Payment received by entrepreneur is profit
The Economic Problem
• Society has virtually unlimited wants 欲望无限
• We have unlimited wants wants– cannot be completely satisfied
• Goods ‘in general’ – if everybody is asked to list down their wants if their income is
unlimited – the list will be never ending
• But the resources are scarce, so output is limited
• This problem is called as scarcity 稀少性
• Economic problem the need to make choices among the scarce resources.
• So, when we study economics we are actually learning on how to allocate resources
efficiently to satisfy our unlimited wants
Scarcity, Choice and Opportunity Cost
• Economics is concerned with how individuals, institutions, and society allocate limited
resources under conditions of scarcity
• Scarcity means limited resources (land, capital and entrepreneurs) relative to unlimited needs
and wants
- As such, we cannot have everything, therefore we must make choices in what we will have
and decide what we must forgo or sacrifice
• What we forgo is called Opportunity Costs
- The opportunity cost of an item is what you give up to get it.
- When making decisions, it’s smart to take opportunity costs into account, and people
often do.
Difference between micro and macro
• Microeconomics ; the study of how households and firms make decisions and how they
interact in markets
- looks at specific economic units, eg : firms, households
- study the effects of rent control on housing in New York City or the impact of foreign
competition on the U.S. auto industry
• Macroeconomics : the study of the aggregate (or total) 对总量/总体的研究 effects on the
national economy and the global economy of the choices that individuals, businesses, and
governments make.
- looks at the economy as a whole
- study the effects of borrowing by the federal government , the changes in the economy’s
unemployment rate over time, or alternative 选择 policies to promote growth in national
living standards.
Positive vs. Normative Statements
• Positive statements: descriptive ( 客观，是什么 not 应该是什么 )
- Attempt to describe the world as it is
- Confirm or refute by examining evidence:
“Minimum Minimum-wage laws cause unemployment.”
• Normative statements: prescriptive ( 主观，应该怎样 )
- Attempt to prescribe how the world should be:
“The government should raise the minimum
Production Possibilities Model
• Society uses its scarce resources to produce different goods and services.
• In a condition of scarcity, society faces many production alternatives and needs to make
choices
• Such decisions can be illustrated by production possibilities, which assumes the following:
- A country produces only two goods.
- It has a fixed amount of resources (labor or capital).
- It has a fixed amount and quality of technology.
- The available resources and technology can all be used to produce. (full employment)
Production possibilities frontier/curve - PPC
• A graph that shows various combinations of outputs
- that the economy can possibly produce
- given the available factors of production and the available production technology
• The PPC is concave towards 凸向原点 the origin, a property which reflects the law of
increasing opportunity cost
PPC: Unemployment and Economic Inefficiency
• PPC shows the various combinations of two goods which can be produced with a given
number of resources and constant technology when the economy is at full employment.
• With unemployment, the economy would produce less than the maximum potential, as
represented by any point which falls within the PPC .
• Full employment or economic efficiency takes place with an economy operating along the
PPC, stretching itself to the maximum potential.
PPC: Economic Growth
• Resources and technology are likely to evolve over time, thereby shifting the position of PPC
and changing the potential maximum output of the economy.
• Consider the impact on PPC of the following events:
- An increase in or discovery of resource supplies
- Improvement in resource qualities
- Technological advancement
• When PPC shifts outwards, the production of both goods can be increased simultaneously.
Three basic questions
1. What to produce?
- Resources are limited so we cannot produce everything that we want
- We have to decide what we really want to produce based on the available resources
- Eg : the government have to decide whether they want to produce a school or a hospital
2. How to produce?
- Once we have decided what we want to produce, we need to know what methods will we
use to produce that good
- Eg : We can choose whether we want to use more labour or more machine
- Certain products needs to have more labour than machines or vice versa 反之亦然
3. For whom to produce?
- Who will use or buy the good or service that we produce?
- It depends on the income that people earn
- A rich person is able to buy goods which are expensive, so the product can be of high
quality
Economic Systems
Different economic systems are featured 特色 by different extent 程度 to which the government
decides how resources should be allocated to deal with scarcity.
1）Planned or command economy 控制
2）Free -market economy 自由
3）Mixed economy 混合
Planned or Command Economy
- Usually associated with a socialist or communist state, in a command economy virtually 几乎 all
economic decisions are taken by the central authority 中央.
- Planning can be studied from three angles:
➢ Resource allocation between current consumption and future investment (i.e. what should be
produced)
➢ Output determination (i.e. how to produce)
➢ Output distribution (i.e. for whom to produce produce)
- Advantages of a command economy ： Problems of a command economy：
high investment, high growth problems of gathering information
table growth expensive to administer
social goals pursued inappropriate incentives 不适当的激励
low unemployment shortages and surpluses 短缺 ，过剩
Free -Market Economy
- In a free-market economy, virtually all economic decisions are taken by individual households and
firms and the government plays very minimal role.
- Main features of a free free-market economy:
➢ Individual liberty 自由 自主 in making economic decisions
➢ Importance of the price system as a rationing mechanism
➢ Reflective of spontaneous changes in demand and supply 反映需求和供应的自发变化
➢ Constant interaction between goods market and factor market 商品市场与要素不断互动
- Advantages of a free free-market economy：
transmits information between buyers and sellers
no need for costly bureaucracy
incentives to be efficient 激励机制，提高效率
competitive markets responsive to consumers 竞争性市场，响应消费者需求
- Problems of a free free-market economy：
competition may be limited: problem of market power
inequality
the environment and other social goals may be ignored
Mixed Economy: A Compromise
- Because of the problems produced by both command and free-market economies, to different
extent the government in may regulate the following:
➢ Relative prices (taxes, subsidies, or direct price controls)
➢ Relative incomes (income taxes or welfare payments)
➢ Legislation of certain consumption and production 消费和生产的立法
➢ Macroeconomic stabilisation
Workshop Question
After World War II, North Korea and South Korea took very different economic paths.
•North Korea followed a command economy, where the government controlled almost all
economic activity.
•South Korea moved toward a market-driven economy with some government support and
planning (closer to a mixed economy).
Question for Discussion:
Based on what u know about economic systems, how might the choice of economic system have
contributed to the different outcomes in North Korea and South Korea? & Advantages
Disadvantages
ANS:
North Korea (Command Economy)
•Economic decisions are centralized, reducing efficiency.
•Lack of price signals and poor incentives led to resource misallocation, shortages, and low
innovation.
•Bureaucratic inefficiency and misalignment between what is produced and what people need
contributed to economic stagnation and poverty.
South Korea (Mixed Economy)
•Encouraged private enterprise and competition, leading to efficient production and rapid economic
growth
•Government provided support where necessary (education, industrial policy) without fully
controlling decisions.
•Balance between market freedom and government guidance allowed better resource allocation,
rising living standards, and technological advancement.
Summary: South Korea’s mixed economy encouraged efficiency, innovation, and growth by allowing
private decision-making with some government support. In contrast, North Korea’s command
economy restricted freedom and incentives, leading to inefficiency, shortages, and economic decline.