Week 1 - the basic economic problem

basic economic problem

issue of scarcity as people are faced with limited resources relative to their unlimited wants.

Economics

the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behavior and interactions of economic agents and how economies work.

Positive economic statements

can be tested objectively, for example: "the unemployment rate would increase if the government stopped subsidising the car industry"

Testing and developing economic theory is known as positive economics

normative economics

involves personal opinion and value-based judgements. It is more based around 'what should be' in the economy.

cannot be tested objectively since they involve a value judgement, for example: "the current unemployment rate too high" or "the government should increase the tax on wine to stop people from overconsuming".

Microeconomics

deals with the economic problem from an individual or 'micro' point of view. e.g. how consumers and producers make decisions, how markets and prices work to allocate resources between all the competing industries in the economy. At the heart of microeconomics is the theory of demand and supply.

Macroeconomics

deals with the economic problem from society's point of view e.g. concerned with the performance of the whole economy. focuses on total economic activity in terms of total production, total employment and the overall price level. The two most important parts of macroeconomics concern the theory of economic growth and business cycles.

scarcity

is that there simply aren't enough resources to satisfy the infinite number of wants (beyond basic wants of food, clothing and shelter). resources are scarce relative to wants. anything you can put a price on is scarce.

opportunity cost

represents the economic cost of a decision. the value of the next best alternative that you give up when making a choice. it usually isn’t money.

example of opportunity cost

“there is no such thing as free lunch” even though the lunch given to you may have been free, that doesn’t mean it’s actually free. There was the cost of producing the lunch that could have been used by the government to contribute to shelters or welfare.

factors of production

land (natural materials/resources e.g. coal, trees), labor (effort, time and skill expended by workers to produce a good), capital (physical assets used in production like machinery, equipment)