Introduction to economics

Free market

• resources are owned + controlled by private individuals

• Market forces determine the 3 questions

Command/Planned Economy

• resources are owned and controlled by the government

• Government determines 3 questions

Mixed Market economy

• Resources are owned + controlled by both private individuals + government

• both determine 3 questions

4 factors of production

• land

• labour

• capital

• enterprise

The Purpose of an Economy

satisfy the maximum amount of needs + wants in society with the scarce resources available

Allocative Efficiency

• a situation in which no one can be made better off without making anybody worse off.

• (produce what people want most)

• answers what + who

Allocative efficiency + PPC

any point on the PPC is allocatively efficient as each fulfils Pareto’s definition.

Productive efficiency

• Produce in least wasteful way possible

  • produce at the lowest possible cost

  • producing the highest quantity with the given resources

Production Possibility curve (PPC)

maximum amount of 2 goods that can be produced with a given amount of factors of production

when is a PPC a straight line

when the material is equally suitable for both goods/services

PPC and Scarcity

• no combination of g+s beyond the PPC can be produced due to insufficient resources

• if a business is producing on the PPC then it will have to reallocate resources based on what is in demand.

PPC and opportunity cost

• if operating on PPC - any increase of production of one good requires the reduction of another

• when moving from below PPC closer to the PPC → no opportunity cost

• The more suitable resources are used first when reallocating resources (less opportunity cost)

PPC explaining Economic growth

• outward shift in PPC due to more/more suitable resources → potential economic growth + increase in productive capacity

• an increase in the amount of g/s produced → actual growth

• most economies produce below PPC curve.

• To sustain long term economic growth, productive capacity has to grow as well (actual growth requires potential growth)

social science definition

a science that investigates aspects of society

economics definition

investigates how to best allocate scarce resources to best satisfy people needs + wants for g+s.

why does economics suffer from cognitive bias

• economists use models to explain/investigate causes + effects

• ceteris paribus (all other things being equal) → changing one variable to isolate the resulting effect.

positive approach + positive statements

• trying to explain how the economy/markets actually work

• based on observation of data

• positive statement → can be factually checked

Normative approach + normative statement

• suggests how markets/economies should work or should be run

• deduction method, goes from general view to specific situations → is biased on value judgements

• Normative statements → cannot be factually checked

utility definition

the enjoyment or usefulness of the consumption of a good or service. People are utility maximisers

Marginal utility + Diminishing marginal utility

• marginal utility - additional enjoyment from an additional unit of a good/service

• Diminishing marginal utility → as we get more used to something enjoyment decreases