Media and Journalism Module
Business and Economics For Reporters
3. Basic Economic Theory - an Introduction
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This week’s lesson
• Background to the study of any
economy:
• Basic Economic Questions
• Economic Decision-Making Model
• Choices
• Opportunity Costs
• Economic Systems
• Private Sector vs. Public Sector
• Micro economics
• Macro economicsBER,Ppt3.ppt
Key definitions
• Wants
• the desires of the people living in an area.
• A means of expressing a perceived need - broader than needs.
• Needs
• the basic requirements for survival like food and water and shelter
• recent shift of certain items from wants to needs.
• For example:
• telephone connections and internet services in western society
• food, water and shelter remain true needs in developing countries.
• Scarcity
• fundamental economic problem facing ALL societies
• how to satisfy unlimited wants with limited resources
• the issue that informs all government decision making and
concerns everyone living in nearly every society in the world
today.
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Basic Economic Questions
• Three basic economic questions:
• What goods are produced?
• What resources are used to produce the
goods?
• Who gets to consume the goods?
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Economic Systems
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Economic Systems
• The way that a country handles these
questions is based on their economic
system.
• There are four main types of economic
systems present in the world:
• the
• the
• the
• the
traditional economy
market economy
command economy
mixed economy.
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A traditional economy
• An economy that answers
the three questions based
on their social customs
and how the society has
dealt with these questions
in the past.
• A country's customs can
differ greatly to that of a
neighbouring country so
traditional economies vary
from
one to another.
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•http://www.grida.no/geo/geo3/english/images/fig44.jpg
A market economy
• The type of economy that operates in most
developed countries today
• The questions are answered in the
marketplace by the interaction of buyers and
sellers.
• For example:
• What to produce - what is popular right now.
• How to produce - the producer's choice.
• For whom to produce - the buyer decides
• A market economy:
• motivates workers to work harder for more
money
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A command economy
• An economy where these questions are all
answered by the government.
• the government decides what the people need
• it is impossible for the government to know
exactly what is best for each and every citizen.
• Command economies:
• don't motivate workers
• everyone given the same amount of goods and
the same standard of living
• No opportunity to increase standard of living
• Today Cuba and North Korea remain
examples of command
economies
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A mixed economy
• An economic system that answers the three
questions both in the marketplace and in the
government.
• Many countries in the world have mixed
economies
• the government plays a role in the economy
• a mixed economy involves producers working
closely with the government
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Choices
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Choices
• The concept of limited resources is vital
• if there are not enough to go around, a choice must be made
• people cannot have all the goods and services they want
• Central to all economic theory
• limited choices and everyone - consumers, business,
governments, etc – must make choices.
• compare the additional costs of alternatives with the
additional benefits
• People acting individually or collectively through government,
must choose which methods to use to allocate different kinds
of goods and services.
• The concept of choice means markets exist
• buyers and sellers interact and make choices
• market prices are determined and the allocation of scarce
goods and services is achieved
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CHOICES - Wants, Needs and Scarcity
How does a Government choose:
•Wants?
•Needs?
•Scarcity?
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Opportunity Cost
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Opportunity Cost
• The sacrifice
made when
selecting one
product or
service over
another.
• A way of
measuring the
true cost of
something by
looking at the
alternatives
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Jale’s business
• Opportunity Cost Example:
• Consider a businessman called Jale. Jale is
working in a comfortable job for the
government and receives $16,000 a year
in salary.
• However, he has had a great idea for a
scuba diving business and he thinks he
can make $25,000 a year in the business.
• So to choose between the two options –
starting out his own business and staying
in his secure job, Jale has to consider the
opportunity cost of the options.
BER,Ppt3.ppt
•http://www.terragalleria.com/pictures-subjects/pacific-islanders/picture.pacific-islanders.hawa33004.html
Jale’s Business
By starting a business Jale will forego:
• $16,000 per year salary ($200,000 in ten years,
taking increases into account)
• Buying a house anytime soon (the money he
saved for the house will go towards the business
and he will need to borrow some money from his
superannuation fund as well)
• Traveling around the Pacific on Government
business
• Not working after 5pm and enjoying lazy
weekends where he doesn’t have to worry about
work
• Low risk of retiring BER,Ppt3.ppt
poor
Jale’s Business
By choosing the job Jale will forgo:
• Ownership of a business projected to be worth
$185,000 by year 10
• $24,000 per year salary for the first five years
(based on projected earnings and re-investing
non-essential money into the business)
• Turning his scuba diving hobby into a way of life
as he’s always wanted to
• The only realistic chance of owning a new car
• Early retirement
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Jale’s Business
• Based on Jale’s priorities and philosophy on
life some of the above costs will seem much
greater.
• When major decisions are put in this form
you can immediately perceive a difference in
cost, even if it isn’t always possible to
quantify it exactly in dollars.
• Each decision is framed in terms of forgoing
the other’s benefits, the perceived lower cost
decision is automatically the right one - as
long as you have considered all the major
factors.
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Jale’s Business
• If you were Jale:
• What decision would you make?
• What opportunity costs motivated you to
make that decision?
• How do you balance “what is chosen”
against the “opportunity costs”?
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Opportunity Costs ctd.
• Governments and business managers
justify decisions and actions in terms of
opportunity cost of the alternatives.
• Journalists beware - for example:
• The government staunchly refuses to take
questions about the location of a new
tourism project
• Have the opportunity costs involved in
establishing the project in a different location
been fully explored?
• Was the decision taken for political or personal
reasons?
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Tools for the Journalist
• Consider the opportunity cost of the
project and identify issues or establish
a line of questions that you could
pursue.
• It is through this kind of analysis that
you can examine decisions and use this
economics theory to help you prepare
well researched articles.
•As a journalist, you should always examine what is
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•not being said as well as what
is being said in these instances.
Economic Decision Making Model
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Economic Decision-Making Model
• Supply and demand
• Production decisions are made based on
demand for goods and services.
• Supply of goods and services is dependent
upon demand for the same.
• Consider:
• Why do movies that are more popular
show for months at the cinema when
those that aren't as popular close quickly?
• Why are there peak and non-peak rates at
resorts?
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The law of demand
• The law of demand - during a specific
time period the quantity of a product
that is demanded is inversely related
to its price, as long as other things
remain constant.
• The basic rule is:
• The higher the price, the lower the
demand; the lower the price, the higher
the demand.
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•http://futures.tradingcharts.com/learning/law_of_demand.html
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The law of demand
• Ceteris paribus – “all things being equal” or
in other words, as long as other things
remain constant.
• For example
• an economist may say that the price of fish will
fall, ceteris paribus, in the coming year
• This means if everything else stays the same the
economy will deliver a reduction in the price of
fish …… BUT will everything remain the same?
•Ceteris paribus
is a useful caveat
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Substitutions
• Consider an item that is in high demand but
quite costly:
• The demand for this item drops sharply
• WHY?
• Perhaps there is a substitute
• A pirated copy of a movie
• A similar “look alike” product – Billabong / Bulabong
• Substitution happens as a result of economic
decisions made by consumers
•What other “substitutions”
do you know?
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The law of supply
• The law of supply - the greater the
demand, the more that will be
supplied; the lower the demand, the
less that will be supplied.
• The amount supplied is based on
capacity and willingness to supply the
product at a specific price.
BER,Ppt3.ppt
•http://futures.tradingcharts.com/learning/law_of_demand.html
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The law of supply
• How does a producer know how much
to charge for the goods and services?
• the demand for and supply of goods and
services can be plotted on graphs.
• intersect at the equilibrium price - the
price where all supplied will be demanded
• If the price is below equilibrium - a
shortage
• If the price is above equilibrium - a
surplus
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Economic equilibrium
A state of the
world where
economic
forces are
balanced and
in the absence
of external
impacts the
(equilibrium)
values of
economic
variables will
not change
•http://futures.tradingcharts.com/learning/law_of_demand.html
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Private Sector vs. Public Sector
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•http://www.english.uiuc.edu/maps/depression/photoessay.htm
The Great Depression
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Private Sector vs. Public Sector
• Before 1929, the role of the government was to
protect its citizens by making laws and running the
country and that market forces would mean a
nation’s economy would be self-regulating.
• The Great Depression (1929-1933) changed that
thinking:
• Widespread bankruptcies, poverty, despair and massive
unemployment
• People turned to the governments to save them.
• What could governments do?
• Reduce expenditure, lower wages and embrace a very
austere regime? OR
• The opposite approach – government spending would
stimulate the economy.
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John Maynard Keynes
As an economic
journalist
you will hear
a lot
about Keynes
• John Maynard Keynes died in 1946 but much
of his thinking still informs economic analysis
today
• Famous British economist
• Book “The General Theory of Employment,
Interest and Money” - the turning point in the
history of economic thought.
• Keynes challenged the ‘don’t spend’ beliefs,
stating: that a government should “spend
money building pyramids or fund wars to
create new wealth, or even spend money to
dig holes”.
• Keynes is closely associated with the macroeconomic approach to the economy - looking
at an economy as a whole as well as the
variables that affect it.
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Role of government spending
• As journalists you will often face issues
concerning the role of government spending
• Should governments invest in a particular issue?
• Should governments ‘bail out’ a non-performing
company for the greater good of the economy?
• Shouldn’t the government concentrate on setting
laws and be removed from economic issues, etc
etc.
• There are no right or wrong answers to
these questions – but they need to be
carefully examined.
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Microeconomics / Macroeconomics
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Microeconomics / “Price Theory”
• The four sectors of an economy:
• the household, the business, the government
and foreign markets.
• Microeconomics or “Price Theory”:
• How these sectors allocate their limited resources
• A subfield of economics concerned with the
behavior of those sectors and the interaction of
buyers and sellers in various types of markets.
• Deals with how households and firms make
decisions and how buyers and sellers interact to
determine market prices.
• These prices determine the allocation of scarce
resources and their BER,Ppt3.ppt
benefits.
Macroeconomics
• Macroeconomics - deals with the
behavior of the economy as a whole
and with economic problems such as
unemployment or inflation.
• In coming weeks:
• the tools that we can use to measure an
entire economy
• consumer price index, inflation, Gross
Domestic Product, etc.
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Summary
• Basic Economic Questions
• The three important questions to consider in economic
theory
• Economic Decision-Making Model – which helps answer
those basic economic questions.
• Choices – why different decisions are made
• Opportunity Costs – what happens if we choose one
thing over another
• Different Economic Systems in place in the world
• Role of private and public sector in the economy
• Two main subfields of economics
• Micro economics - examining individual components of the
economy
• Macro economics -a whole of economy look.
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Coming up!
• Economic issues of major importance to the
Pacific Region
• Ways in which governments and business
have tackled some of the major issues.
• Subjects are:
•
•
•
•
•
•
•
Contemporary history
Development assistance
Preferential Trade agreements
Investment and Tourism Climate
Remittances (from overseas nationals)
National Budget
Government revenue shortfall
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•www.arts.yorku.ca/.../courses/AN3220/3220.html