 and welcome to the session in which we would look at economic concepts, a topic that's covered on the CPA exam, BEC section. The economic concepts covers 20 to 25 percent of the BEC section. They are tested in terms of terms or conceptual concept. So simply put, if you understand the concept, if you know the terms and sometimes it's basically straightforward definitions, you should be able to pick up extra points for that section, basically easy questions to answer. Now, if you're studying for the CPA exam, I strongly suggest you take a look at farhatlectures.com. Most likely you have a CPA review course. That's great. I don't replace your CPA review course. I'm a useful addition to your CPA review course. I can be a supplemental tool to your CPA review course. Your risk with me is one month of subscription. Your potential gain is passing the exam. So if not for anything, take a look at my website to find out how well or not well your university is doing on the CPA exam. I do have resources for other accounting, finance, and other thing courses. So please take a look at my website, whether you are an accounting students or CPA candidate. If you haven't connected with me on LinkedIn, please do so and take a look at my LinkedIn recommendation. Like my lectures on YouTube, share them, connect with me on Instagram, Facebook, Twitter, and please connect with me on Reddit. So first we need to know why do we study economics? Well, simply put, we have something called scarcity of resources concept. And what is that? That concept basically state that we have limited resources, limited amount of money, limited amount of gold, limited amount of iron ore, limited amount of time. So as a result, we have to allocate those resources appropriately. At the same time, we have unlimited wants and needs. So how do we allocate those resources is the reason why we study economics, because we want to have the optimal, optimal usage of the resources. So without economics, we may not be able to be able to do so. So the CPA exam will cover how the production, the distribution, and the consumption of good. And the reason is to optimize the desired outcome. What does that mean? Optimize the desired outcome. It means improve the living condition, whether the individual for a country or international level. So by studying economics, you can optimize those desired outcome. That's the basic concept. That's the underlying concept of economics. If we have unlimited resources, then we don't have to study economics. We can do whatever we want to. We don't care because we don't have to give up any other alternative. But that's not the point. We have limited amount of resources. And this is where the scarcity of resources becomes the basic theory behind why do we study economics. Now we have three areas of economics that we need to be familiar with. And those are microeconomics, macroeconomics, and international economics, as far as the CPA exam. And you need to know what each suction is. And we're going to have to cover microeconomics, macroeconomics, and international economics, each one of them in a subsequent lectures. Microeconomics is the study of individual consumer household firm or specific market. That's what you're doing. So you are studying the supply and demand for that individual consumer household or firm. Also, the prices and output, as well as the effect of external forces on the economic activities of these various units. So this is the microeconomics. And we're going to be starting looking at microeconomics, starting with the law of supply and demand, prices and output, so on and so forth. Then we have to study the macroeconomic, which is the study of the entire economy or major aggregate of it, which is basically an industry of the whole economy. Here you are looking at the aggregate output, the total output, not one thing at a time. Also aggregates demand and supply versus a demand or supply for a specific consumer or household activity, prices and employment level on a national level, national income, government policies, regulation, and any similar factors. International economics, here we are dealing with activities between countries, between nations, and what the results are of these activities. What are the results? Well, you buy in foreign currency, you're going to have an exchange rate, because for example, if you want to buy a product from Europe, you have to pay in euros. There's a price for the euro. It's called the exchange rate, balance of payments, trade balances. For example, when we have a trade with China, we always have this issue. The balance of trade is stepping toward China, because China sells us more product than what it buys from us. The trade balance that's important, this is international economics. Reason for international economic activity, we have to learn about socio-economic issues, geopolitical issues as well, gets involved in here, international transfer pricing. This topic is covered more in accounting, but we'll cover it briefly. And obviously, the globalization, which is the result of international activities, international trade. When we study economics, you have to be familiar with the graphs, and you know how to read a graph. So in this session, this is just basically an introductory session. So what is a graph? A graph is you have an x-axis and a y-axis. And to remember the y, just go like this. This is the y-axis. If you want to remember why the y-axis. Usually in economics, generally speaking, on the y-axis, we have the dollar amount. On the x-axis, we have the quantity. And basically, what is a graph before we proceed? It explored the relationship between two variables, x and y, quantity and price for our purposes. We have a dependent and independent variable. Most of the time, most of the time, you would say that y is the independent variable, y is the independent variable, and x, the quantity, is the dependent variable. Most of the time, you can go with this. It doesn't mean it's going to be always the case, but most of the time, you can go with that. This point here where the x-axis and the y-axis meets, it's called the origin, the point of origin. When a line touches the y-axis in a plot, we call this the intercept. Just basic concepts you need to be familiar with. The relationship between x and y between those two variables could be positive or it could be negative. Negative is, let's start with negative first. Negative would look something like this. And to remember that it looks something like this, the negative, it's downward. D for down, it's going downward. This is a negative relationship between the two. Or the relationship could be a positive relationship. Positive relationship. For example, an example of a positive relationship, as the price of an item goes up, the quantity supplies goes up. So as the price goes up, the quantity supplies goes up. This is a positive relationship. Let's take a look at a negative relationship. Negative relationship is as the price, as the price of the items goes up, the quantity demanded. As the price goes up, as the price goes up, you know, as the price, this is the price, as the price goes up, the quantity demanded goes down. And hopefully this makes sense. This is a negative relationship between price and quantity. Sometime the relationship could be neutral. For example, if the graph looks like this, this is a neutral relationship. Why the price is fixed and the price is fixed and the quantity is changing. The relationship, it's a neutral relationship between the two. Or the relationship could be neutral this way, where the quantity is fixed and the price is increasing. Also we could have a graph that's called time series, where it shows you over time what's going on between the relationship between two variables here, price and quantity. So these are basic reading of graphs. We're going to look at many graphs later on down the road. We have many economic system, but we're going to be looking at the two extreme economic system, but many systems fall in between those two extreme. We have the command system, which is one of the extreme, which is socialism or communism, and the market system, which is kind of capitalism. Those are the two extreme. Now it doesn't mean there are not in between, there are many in between, the combination of the two, but those are the two extreme. So let's take a look at what is a command system or communism or socialism. This is where the government largely determined the production, distribution and consumption of goods and services. So the government tells you how much to produce, how much to consume, how to distribute it, so on and so forth. So the government owns the resources, owns the ownership of resources, not the individuals, not the businesses. And the decision is made by a centralized planned planning board. So someone in the government, they have the central planning office, and they tell you how much to produce a day, how to distribute it, and how much to consume basically. Examples of these economies are in Venezuela, North Korea, Cuba, and Myanmar. Those are still countries that follow the command, strict command social system. The market system is a mix of decentralized decision making with some government control. You still have a little bit of government control. Now the degree of government control, some will have more, some will have less, but we have the other extreme the market system. This is where individuals, businesses and other entities, notice here individuals, businesses and other entities think of the US as an example of the in the US, determine the production, distribution and consumption versus the government does that. That's the difference. Here the system can be found in much of the world, especially in the US, Western Europe, Japan, private market are determined by the private market are the dominant forces. They determine the price for the goods and services based on the supply and based on the demand. Simply put, individual and businesses, together working together, they determine the price and the market. So here the ownership are private in contrast to the government. So people actually own the goods and everybody make the decision that's in their best self-interest. So there's a self-interest behavior here versus here the government makes that decision on your behalf. It's helpful to know how the economy works basically from an overall perspective. So this is basically a simplified example to show you how goods, services and resources flow between the economy. So this is a simplified version, but it's very important that you understand it in order to see the big picture. First we're going to start with people. Obviously you can conceptualize that we have people like you and I that sell resources. What are those resources? What do we sell? We sell our time, we sell our effort, we sell our entrepreneurial spirit. We provide money. If we have extra money, we provide it. To who? We provide it to the market that's requiring it. We need there's a resource market and household we provide those resources. Now as a result, when we provide that we're going to get in return money, wages, rent and interest. So if we work, we want to be paid. We're going to be paid money. Well, if we invest our money, we expect to get interest in return. We expect to get dividend. So this is what we get. So we provide our resources, we get money in return. We get resources in return obviously. Now what's going to happen? Businesses, they're going to use our resources, use our time, effort, entrepreneurial spirit, whatever it is. Let's assume we're manufacturing a computer. Well, guess what? We're going to put that computer together. They're going to pay us for our time. They're going to pay us for our expertise. So the businesses on the other hand, so this is the other party, businesses will buy those resources. And for the businesses, when they buy those resources, it's a cost for them. So notice here, this is a revenue. When the people provide the resources, they generate revenue. When the business use those resources, they incur cost or an expense. So when they get the resources. But what happened, businesses, they're going to take this computer, they're going to put it together, and they're going to provide this computer to the market. They're going to sell the business sell to household, to the household, to the people. They're going to sell those goods and services to the people. The people are going to buy those computers, electronics, okay. And in return, they're going to buy the product and pay back some of the money, pay back some of the money that they generated. This is a simplified example. They're going to buy goods and services from businesses. Then the money that's provided by the businesses is considered revenue or sales for the business. And this is how the economy works. The people provide goods and services, resources, then the businesses will produce goods and services, the people will buy them, and the economy keeps on running. And this is how the economy works from an overall perspective. It's very important to understand this picture, because when we start to talk about supply and demand, you have to understand there's a price that businesses pay for goods and services, and there's a price that the businesses sells those goods and services for. So you have to understand the big picture. How does it affect the people, the consumers versus the business? At the end of this recording, again, this is an introductory session for the economic concepts on the CPA exam. The next thing we're going to be looking at is the law of demand. Then we're going to look at the law of supply, so on and so forth. So it's very important that you understand the basic concepts step by step. At the end of the day, take a look at my resources. I might be able to help you pass the CPA exam along your CPA review course. Study hard, good luck, and of course, stay safe.