Theme 2: Understanding Basic Economics

What is economics?

The study of how a society uses it’s scarce resources to produce and distribute goods and services

What is microeconomics?

The study of small economic units, e.g. individuals, businesses, and industries

What is macroeconomics?

The study of the larger economy as a whole or in its basic subdivisions, e.g. government spending, inflation, unemployment

What are the 5 key economic assumptions?

Society’s wants are unlimited, but all resources are limited

Due to scarcity, choices must be made. Every choice has a cost

Everyone’s goal is to make choices that maximise their satisfaction. Everyone acts in their own self-interest

Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice

Real-life situations can be explained and analysed through simplified models and graphs

What is scarcity?

A condition of any productive resource that has finite supply

What a the two-powerful effects of scarcity?

It creates competition for resources

It forces trade-offs, giving up one thing to get something else

What are trade-offs?

The alternatives that we give up whenever we choose one course of action over another

What is opportunity cost?

The value of the most desirable alternative given up as a result of a decision

What does a demand curve?

Shows the amount of product that buyers will purchase at various prices, all things being equal. As price decreases, demand increases and vice versa

What does a supply curve show?

Shows the amount of product that sellers will offer sale at various process, regardless of demand

What is the equilibrium point show?

The point at which quantity supplied equals quantity demanded

What is inflation?

A generalised rise in prices across the economy

What is deflation?

A generalised fall in prices across the economy

What is price index?

Monitors the inflation or deflation in various sectors of the economy

What is the Consumer Price Index (CPI)/Harmonised Index of Consumer Prices (HICP)?

The official measure of inflation of consumer prices in the UK

What are the 8 major groups of the CPI?

Apparel

Transportation

Education and Communication

Other Goods and Services

Recreation

Medical Care

Food and Beverages

Housing