Lecture 08
DIVIDING UP
ECONOMICS
&
GDP, INFLATION
ENGINEERING
ECONOMICS
Lecturer:
Engr. Afshan Naseem
DEPARTMENT OF ENGINEERING MANAGEMENT
COLLEGE OF E&ME, NUST
Goods, Utility, Wealth, Value
Goods
 Goods
mean material merchandise which can
be witnessed felt and shifted.
 Goods are classified into material and nonmaterial goods.
 Material goods are tangible, they can be
noticed, handled and relocated.
 On the contra, non-material goods are
intangible and they do not possess any
character or power and cannot be observed,
fingered or transmitted.
 Services of all types of goods such as doctors,
engineers, lawyers, teachers etc., are nonmaterial goods. But both the types have values
in monetary terms.
Goods (contd.)
 Economic
goods are those which has price and
value. Their supply is generally lesser than the
demand.
 Non-Economic goods are price free goods such
as free gifts which has no price and are unlimited
in supply. Air, water, light and heat are some
examples of non-economic goods.
 Consumer goods are those which are readily be
consumed and satisfies the needs to the
customers directly.
 Whereas Producer's goods such as machinery,
plants etc., serves the customers directly or
indirectly. They help in production of other
goods.
Utility



The needs fulfilling power of a product is
called utility.
It is a quality possessed by a product or
service to satisfy human requirements.
Utility is based on the following types. They are


Forms Utility - When utility is created by
changing its shape or form and consumed is
termed as form utility. For instance, a wood is
turned into a shape of furniture.
Place Utility - With the example given above, if
the furniture is taken to the work place, it
becomes place utility.
Utility (contd.)



Time Utility - When a product is warehoused
for the purpose of economic boom, it
created time utility.
Service Utility - When the professionals does
service according to the needs of the
customers forms the service utility.
Possession Utility - If for instance, an
Economics book on principles is been
possessed by an economic student, then it
creates possession utility.
Value
 Value
and Value-in-use are divergent
meanings. Value in general means price
value. For instance, if we are hungry and
need food and nearby is a fruit tree which
is easy accessible, then eating a fruit from
the tree quenches hunger. This is known
as Value-in-use.
 In economics value means value in
exchange, where goods and services are
exchanged for some consideration.
Value in Price
 In
general, the meanings of value and
price is the same, which is money. In
economics, value and price are two
different terminologies.
 Price is value articulated in terms of
money.
 Value is uttered in terms of other goods.
 Value is virtual concept in association to
the concept of price.
 It means there cannot be a general rise or
fall in values but prices can have rise or
fall.
Wealth
 Wealth
means money, property, gold etc.
But in economics it is used to portray all
things that have value.
 For a product to be called wealth, it must
posses utility, scarcity and transferability.
 In the event of lacking even one quality it
cannot be connoted as wealth.
Forms of Wealth





Individual Wealth - Wealth owned by individuals is
called private or individual wealth. Eg: House property,
Gold, Vehicle Etc.
Social Wealth - Goods owned by the society as a whole
such as Temples, Roads, Forests Etc.
National or Real Wealth - It includes individuals, society
as a whole and its wealth. It comprises of material
assets possessed by the society. National wealth is the
real wealth.
International Wealth - The UNO, UNESCO, WHO, IMF,
World Bank consists of International wealth since all
nations contribute towards the benefit of these
organisations.
Financial Wealth - Financial wealth is holding of money,
stocks, bonds, etc. by individuals in the society.
Financial wealth is expelled from national wealth. This is
because money, stocks are held by individuals as
wealth are claims against one another.
DIVIDING UP ECONOMICS
Economics
 It


is made of
Macro economics
Micro economics
Macroeconomics
 Macroeconomics
is concerned with the economy
as a whole.
 It is concerned with aggregate demand and
aggregate supply.
Aggregate Demand & Aggregate
Supply
 By
'aggregate demand‘ means the total amount
of spending in the economy,



whether by consumers, by overseas customers for our
exports,
by the government, or
by firms when they buy capital equipment or stock up
on raw materials.
 By
'aggregate supply' we mean the total national
output of goods & services.
Microeconomics
 Microeconomics
deals with individual parts of the
economy.
 It deals with the demand and supply of particular
goods and services and resources:
 Examples:

cars, computers and coal.
Scarcity
 Scarcity
is the excess of human wants over what
can actually be produced.
 Not all people face the problem of scarcity to the
same degree.
 Example:


A poor person is unable to afford enough to eat or a
decent place to live.
A rich person cannot afford a second Mercedes Benz.
 Thus
the problem of scarcity is not an equal one.
 All people, both rich and poor, want more than
they can have.
Balance at the Micro and
Macro levels




Given the problem of scarcity,
Potential demands will exceed potential supplies.
It has to try to match demand and supply.
Macro Level




Demand = Supply at the level of the total or overall
economy also.
Thus Aggregate demand needs to be balanced with
aggregate supply.
This means that total spending in the economy must
balance total production.
Micro Level


Demand = Supply at the level of individual goods and
services.
The demand and supply of video recorders and cars must
also balance.
Macro economics
Macroeconomics studies 3 major issues:
1.
the determination of national output and its
growth over time.
2.
It studies the problems of stagnation,
unemployment, inflation, the balance of
international payments and cyclical
instability
3.
Policies adopted by governments to deal
with these problems.
Inflation & Balance of Trade


Inflation refers to a general rise in the level of prices
throughout the economy.
If aggregate demand rises substantially,







firms are likely to respond by raising their prices. If demand is
high, they can still sell as much as before (if not more) even at
the higher prices, and
thus make more profits. If firms in general put up their prices,
inflation results. .
Balance of trade deficits are the excess of imports over
exports.
If aggregate demand rises, people are likely to buy more
imports.
So they will spend on Japanese DVD players, German cars,
etc.
Also if inflation is high, home-produced goods will become
uncompetitive with foreign goods.
We are likely, therefore, to buy more foreign imports, and
foreigners are likely to buy fewer of our exports.
Unemployment & Recession
 If
aggregate demand is too low relative to
aggregate supply, this generally leads to
unemployment and recession.
 A recession occurs when output in the economy
declines:
 A recession is associated with a low level of
consumer spending.
 If people spend less, shops are likely to find
themselves with unsold stocks.
 If firms are producing less, they will need a smaller
labor force.
 Thus cutbacks in production will lead to
unemployment.
GDP
Gross Domestic Product
(GDP)
 GDP
is the primary measurement of
economic performance.
 It is the dollar value of all final goods and
services produced within a country’s
borders in a given year.
Pakistan GDP Growth Rate
Pakistan GDP Growth Rate
(contd)
Calculation of GDP
 The
most common method used to
calculate GDP is called the expenditures
method.
 This method adds up the amount of
money spent on consumer purchases,
business purchases, government
purchases, and net exports (Exports minus
Imports).
GDP Limitations
 GDP
is probably the best measurement of
economic performance.
 However, there are primary limitations to
GDP.
 GDP measurements do not include nonmarket activities, underground economic
activities, negative externalities, and the
overall quality of life.
GDP & GNP
INFLATION
Inflation
 This
is a rise in the general level of prices.
 There are two primary theories about
what causes inflation.
 These are the demand-pull and cost-push
theories of inflation.
Demand-Pull Inflation
 This
type of inflation is caused by an
increase in consumer demand.
 Consumer demand literally pulls the
price up.
 “Too much money chasing too few
goods” is an old saying that explains
demand-pull inflation.
 This means that the supply of goods
can’t keep up with the demand for
goods. Consumers will compete with
one another for the goods, hence,
bidding the prices up.
Cost-Push Inflation
 This
type of inflation is caused by an
increase in input prices.
 This means that it costs more for
manufactures to produce a good or
provide a service.
 This increase in cost is then passed on to
consumers.
 An increase in the price of oil will cause
an increase in the price of many
products. This is because oil is used in
the production of many products
including gasoline, chemicals, plastics,
and pesticides.
Planning for Capital Needs
 Capital:
any form of wealth employed to produce
more wealth
 Fixed capital: to purchase a company’s permanent
or fixed assets such as land, buildings, computers,
and equipment
 Working capital: to support a business’s short-term
operations
 Growth capital: to finance a company’s growth or
its expansion in a new direction
Equity vs Debt Capital
 Equity
capital:
represents the
personal investment
of the owner (s) of a
company
 Debt capital: the
financing that a
small business
owner has
borrowed and must
repay with interest
Bond
A
certificate of debt issued by a
government or corporation guaranteeing
payment of the original investment plus
interest by a specified future date.


Dividend: Profits of a firm that are
distributed or given out to its investors
(stockholders).
Credit: The giving of goods and services in
return for the promise of payment at a
future time. The payment usually has
interest attached.
Tax
A
contribution for the support of a
government required of persons, groups,
or businesses. There are many different
kinds of taxes including income, sales,
state. local, federal taxes.
 Tariff:

A tax on imports or exports by the
government.
DISCUSSION