BASIC CONCEPTS OF ECONOMICS

By Sehrish Shafqat

DEFINITION
Broad Definition: How people organize to meet their material needs. Narrower Definition: How society allocates resources and distributes goods and services. An economic system - turns resources into goods and services -- allocation - and gives them out to people to use -- distribution

BASIC CONCEPT
Resources Scarcity and Choice Capital investment cost

RESOURCES
used to produce goods / services to satisfy human wants. Things that can be used to make other things. Inputs into production. Resources can be

tangible,

like a lump of coal

intangible,
like an hour of your labor or some knowledge you have

TYPES OF RESOURCES:

Natural resources: e.g. sunshine, rain, crude oil,land Human resources: labour, service Man made resources: e.g. machines, equipments,building

SCARCITY

Resources are insufficient to satisfy ALL human wants A relative concept: we want more than we have Their quantities are insufficient to satisfy all human wants

IS SEA WATER SCARCE?

Is it fixed in supply? Do we want more sea water than we have?

Sea water is not scarce

ARE THEY SCARCE?

Sunshine

in Thailand

free sample of candies given at a shopping centre air in a caf with many smokers

Fresh

Sand

in the desert

CAPITAL
Capital is anything that people produce that is then used to make other things. This is different from the business usage, where capital refers to money. In economics, capital can be

equipment, machines, buildings, intermediate goods, like steel beams used later to build a building, knowledge, developed through experience or education, human physical ability developed through exercise.

INVESTMENT
Economics usage: Investment = Adding to capital. Investment examples:

Building a building Installing a machine You are investing in our educational capital by enrolling in this course.

CLASS TASK
Is health is a capital? Is health is a consumption good & investment good? Examples of 5 limited resources? How & why?

Health can be regarded as capital Capital is whatever people make to help them make other things. Having health helps a person make things, so health is capital.

Health care -- a consumption good and an investment good Health care is purchased to enhance health. Health enhances our enjoyment of life. Health care is a consumption good. Health enhances labor productivity. An investment is any action that increases capital, including human capital. Health care is an investment good, too.

ALLOCATION & DISTRIBUTION

Allocation decide which resources are used, in what ways, to produce which goods and services. Distribution decide which goods and services go to which people(who gets what) also, which jobs go to which people(who does what).

ALLOCATION & DISTRIBUTION

We compete for the use of limited resources

Two ways of competition Price competition Non price competition e.g. waiting, examination, lucky draw.

Making Choice:

Which

restaurant will you go for lunch? What would you like to study at university? What will you buy with $100? CD or dress ?

CATEGORIES/ TYPES OF ECONOMICS

Microeconomics - The study of the decisions of people and businesses and the interaction of those decisions in markets. The goal of microeconomics is to explain the prices and quantities of individual goods and services.

Macroeconomics - The study of the national economy and the global economy and the way that economic aggregates grow and fluctuate. The goal of macroeconomics is to explain average prices and the total employment, income, and production.

The Modern economy

Economy - A mechanism that allocates scarce resources among alternative uses. This mechanism achieves five things: What, How, When, Where, Who.

Decision makers - Households, Firms, Governments.

Household - Any group of people living together as a decisionmaking unit. Every individual in the economy belongs to a household.

Firm - An organization that uses resources to produce goods and services. All producers are called firms, no matter how big they are or what they produce. Car makers, farmers, banks, and insurance companies are all firms.

Government - A many-layered organization that sets laws and rules, operates a law-enforcement mechanism, taxes households and firms, and provides public goods and services such as national defense, public health, transportation, and education.

Market - Any arrangement that enables buyers and sellers to get information and to do business with each other.

CLASSIFICATION OF ECONOMY
Rich or poor Socialist Capitalist Mixed Developed Underdeveloped Developing Agricultural & Industrial Planned & unplanned

OTHER TERMS
Goods/services Utility Value Price Wealth income

BASIC CONCEPTS OF ACCOUNTING

WHAT IS ACCOUNTING?
The language of business. A means to communicate financial information. A way to convey information about a business to users.

FUNDAMENTAL CONCEPTS
Who uses accounting information? Owners Managers Investors

Analysts on their behalf

Creditors Government (tax assessment) Regulators Customers

DEFINITION
Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature about economic entities that is intended to be useful in making economic decisions or making reasoned choice among alternative courses of action. OR The process of identifying measuring, and communicating economic information to permit informed judgments and decisions by users of the information

ACCOUNTING SYSTEMS
Objectives of an accounting system:
To process the information efficiently-at low cost To obtain reports quickly To ensure a high degree of accuracy To minimize the possibility of the theft and fraud

BASIC TERMS
Asset - property with a cash value that is owned by a business or individual. Liquid Asset - cash or other property that can be easily converted to cash Credit - an account entry with a negative value for assets, and positive value for liabilities and equity. Debit - an account entry with a positive value for assets, and negative value for liabilities and equity.

BASIC TERMS

Liability - money owed to creditors, vendors, etc. - Long term liabilities :are those that are usually payable after a period of one year, for example, a term loan from financial institution or debentures (bonds) issued by the company. - Short term liabilities: are obligations that are payable within a period of one year, for example, creditors (accounts payable), bills payable (notes payable), cash credit overdraft from a bank for a short period. Equity - money owed to the owner or owners of a company, also known as "owner's equity Owners Equity = Assets - liabilities

BASIC TERMS
Revenue: Increase in economic resources resulting from normal operations of the company. Expenses: Decrease in economic resources resulting from normal operations of the company

ACCOUNTING EQUATION

Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity

This equation is always in balance

FINANCIAL STATEMENTS

Record keeping is done in terms of financial statements. BALANCE SHEET INCOME STATEMENT CASH FLOW STATEMENT

Presents the financial position of a company at a given point in time Comprised of three parts: Assets, Liabilities, and (Ownership/Stockholder's) Equity Remember the important basic equation:

Assets = Liabilities + Equity

Presents the results of operations over a period of time Composed of Revenues, Expenses, and Net Income

Revenue: source of income normally arising from the sales of goods and services and is recorded when it occurs

Expenses: costs incurred over a period of time to generate the revenues earned over that same period of time

Example: Wages When a company incurs an expense outside of its normal operations, it is considered a loss

Example: Destruction of a building in a fire

A purchase is only considered an asset if it also provides future economic benefit outside of the current period.

Paying for wages vs. Paying for equipment

Net Income:

Positive Net Income indicates the company generated a profit (net profit) Negative Net Income indicates the company suffered a net loss

CASH FLOW STATEMENT

This report or statement provides relevant information about the cash receipts and cash payments of the firms during a period. Its likewise reports the cash effects of an enterprises operation, its investing transactions, as well as its financing transactions. The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit.

COST

An amount that has to be paid or given up in order to get something. Cost can be described as
Direct and Indirect Variable, Fixed and Semi-variable Recurring and non-recurring

DIRECT COSTS
Can be traced back to a product and can be measured Are specifically identified by their objectives Include materials, labor and other direct costs

DIRECT COSTS - EXAMPLES

Direct materials Direct labor Direct work hours

Use of equipments

Use of facilities

Number of employees

Use of materials

Consumption of services

INDIRECT COSTS
Costs not directly related to the project product

Not directly identifiable

Belong to the core supporting business, but cannot be directly assigned to projects or individual contracts

Include
Fringe benefits Indirect manufacturing expenses General indirect expenses General and administrative expenses

VARIABLE COSTS

Vary as changes in the production are implemented

Can or cannot be proportional to these production changes

Include expenses with equipments and materials, performance bonuses, freight and sales comissions, for example

If theres no production, theres no variable cost

FIXED COSTS
Remain constant in the total, independently of the amount of work performed Remain the same even when the production line pauses or is null Include costs like rent, depreciation, administrative team salaries and general expenses

RECURRING AND NON-RECURRING COSTS

Recurring Costs Repetitive, directs or indirects, which vary depending on the production Daily/weekly/monthly/etc costs

Non-recurring costs One-time expense only Development, investment and other costs that are paid only once