1.1-1.2: Introduction to Economics

Economics

The study of how society allocates scarce resources among unlimited wants and needs.

Microeconomics

How producers and consumers interact in individual markets.

Macroeconomics

Factors that affect the economy.

Cost-benefit analysis

Choose the option that gives the most utility by weighing up the pros and cons of each outcome.

Opportunity cost

The next best thing sacrificed as a result of a choice.

Trade-off

Anything given up as a result of a choice.

Free goods vs economic goods

Abundant

Scarce and competition for it exists

Incentive

Something that motivates an individual to act in a certain way.

Basic economic problem

1. What could be produced and how much?

2. How should thing be produced?

3. For whom should things be produced?

Rationing systems

1. Planned (command economy)

• Government makes decisions

• Resources owned “collectively”

• DISAD: Lack of liberty and choice, and poor efficiency.

2. Free market economy

• Resources and production are owned privately

• Use of prices to ration g+s

• DISAD: high income inequality, over provision of demerit goods, and poor use of resources

3. Mixed market economy

• Some measure of government intervention

Four Factors of Production

Land: Provided by nature (property and resources found under the land)

Labor: All human resources

Capital: Anything made by humans

Entrepreneurship: Management that organizes the factors of production

Production Possibilities Curve

• Graph that shows the tradeoff between the production of different items.

• Maximum combinations of two types of output that can occur if all resources are being used efficiently and technology is fixed.

Inverse relationship between two types of good (why curve is downward sloping)

The Law of Increasing Opportunity Cost:

• increasing quantities of one good can only be achieved by sacrificing ever-increasing quantities of another good

PPC Curve - Points (increasing opportunity cost)

A to G:

• potential output

• productive efficiency exists wherein the economy is using its resources to the maximum potential

I:

• not possible, exceeds the productive capability of available resources and technology

H

• resources are not fully utilized

• actual economic growth is shown through a movement of H towards the PPC (utilize more resources)

PPC Curve - constant opportunity cost

• Production for producing lemons and oranges is largely the same

Change in production possibilities

• Growth - Increase in the quality and quantity of factors of production

  • Improved education

  • Improved production technologies

  • New forms of energy

• Reduce in quality or quantity of factors of production

  • Wars and natural disasters

Circular flow of income

Households supply the factors of production and firms provide payments to the factor

• Labour → Wages

• Land → Rent

• Capital → Interest

• Entrepreneurship → Profit

Leakages and Injections

• Leakages: Some money leave the economy

  • Governments take money in the form of taxes

  • Consumers save

  • Households and businesses spend money on imports

• Injections: money enters the economy

  • Governments spend on public services and infrastructure

  • Financial sector invests money in firms

  • Foreign households purchase exports