293766196 - Economic Dimension What is Economics? Economics...

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1 Economic Dimension – What is Economics? Economics is the study the production and distribution of goods and services, it is the study of human efforts to satisfy unlimited wants with limited resources It studies how agents allocate scarce resources amongst alternatives to meet unlimited human wants
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2 Approaches to Economics Positive Economics: - Examines how decisions are made and the consequences of such decisions - Descriptive process exploring the process of decision making and its impacts Normative Economics: - Examines how resources should be allocated - Prescriptive process analyzing what should be done
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3 Allocation of resources Process occurs at many levels Consumers Firms Government Market System Allocation decisions impact natural environment Want decisions to be based upon incentives that reflect “true” value to society Unfortunately decision makers do not consider “true” value in choices Need for policy intervention to overcome such market failure
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4 Contemporary Economics Macroeconomics – Aggregated analysis John Maynard Keynes in 1936 and 1940 Choices of government Monetary Policy - Federal Reserve Fiscal Policy – Taxes and Spending Macroeconomic targets Income Levels Inflation Employment
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5 Contemporary Economics Microeconomics – Disaggregated analysis Adam Smith’s Wealth of Nations in 1776 Choices of consumers (households) and producers (firms) Two types of Markets Factor Markets – Consumers sell inputs used in production to firms Product Markets – Firms sell final output to consumers Three types of analysis Partial Equilibrium – Focus on single factor or good Multi-Market – Interrelationships amongst key fundamental markets General Equilibrium – Economy as a whole
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6 Economic Theory of Value Value is reflected in prices determined through interaction of supply and demand Supply (demand) reflects trade-offs firms (consumers) make when producing (buying) goods and services Abundance implies lower prices Scarcity implies higher prices Conceptually market forces reflect “true” value to society, but there are reasons why markets may fail Externalities Public Goods Property Rights
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7 Keynesian Economics Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector
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This note was uploaded on 02/26/2011 for the course ENG 307 taught by Professor Dr.t.t.wong during the Spring '11 term at Hong Kong Polytechnic University.

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293766196 - Economic Dimension What is Economics? Economics...

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