microeconomics online course -Financial economics-Economic Systems

Financial economics-Economic Systems

•A market economy- Is one in which market forces are allowed to guide the allocation of resources within a society.

•A centrally planned economy- Is an economy in which decisions on resource allocations are guided by the state.

•Mixed Economies- These are economies in which resources are allocated partly through price signals and partly on the basis of intervention by the State.

The Role of Economics in the real world?

•Economics provides a framework for understanding consumer behavior, government policies, and business developments within a country and abroad. It provides a rich context for making decisions in our business, professional, and financial life is applicable in a wide range of fields.

Government policies-

•Economics enables us to get a better understanding of the objectives, methods and limitations of government economic policy.

e.g.

•How does government policy help reduce environmental pollution?

•How does the tax system affect the incentives for people to work, for families to spend and save, and for firms to invest?

• How do government budget deficits and debt affect the economy?

•The effects of free international trade on Sri Lankans’ standard of living.

•How do the actions and policies of the Central Bank of Sri Lanka affect interest rates and the money supply, and thence the rate of price inflation, the external value of the Sri Lankan Rupee, and international capital flows?

Why we need to study Economics as a subject?

Economics is essential to understand the world in which we live and work and helps us to answer questions like:

1. What determines the prices of the goods and services on which we spend our income, and the prices of the stocks and bonds in which we invest our savings?

2. How does education affect the lifetime earnings of people?

3.Why do some people earn so much and others so little?

4. Why do some jobs pay high wages while other jobs pay low wages?

5.How do firms operating in different market environments, decide what quantities to produce of their product’s outputs.

6.What prices to charge for these outputs, and what quantities of labour and capital inputs to employ