Chapter 1 - The foundations of economics

social sciences (3)

academic disciplines that study human society and social relationships

microeconomics (3)

examines the behaviour of individual decision-making units in the economy.

Two main groups are consumers/households and firms/businesses

macroeconomics (3)

examines the economy as a whole to obtain a broad overall picture of the economy

aggregates (3)

wholes or collections of many individual units, such as the sum of consumer behaviours and the sum of firm behaviours, and the total income and output of the entire economy

scarcity (4)

resources are insufficient to satisfy unlimited human needs and wants

choice (4)

since resources are scarce, it is not possible for all human needs and wants to be satisfied. This means that choices must be made about what will be produced and what will be foregone/sacrificed

efficiency (4)

making the best possible use of scarce resources to avoid resource waste

allocative efficiency (4)

when scarce resources are used to produce what people want and production is efficiency

equity (4)

the idea of being fair and just

economic well-being (4)

• security with respect to income and wealth, having a job and housing

• the ability to pursue one’s goals work productively and develop one’s potential

• the ability to have a satisfactory quality of life, which includes numerous factors such as health, education, social connections, environmental quality, personal security

• the ability to maintain all of the above over time

sustainability (4)

• long-term maintenance or viability of any particular activity or policy

• the ability of the present generation to satisfy its needs by the use of resources, and especially non-renewable resources, without limiting future generations’ ability to satisfy their own needs

interdependence (5)

• economic decision-makers interact with and depend on each other

• nobody is self-sufficient

• occurs on many levels, individuals, communities, to nations and to groups of nations

• consumers, workers, firms, governments, and all other individuals or groups of individuals depend on one another for the achievement of their economic goals

intervention (5)

govenrment getting involved with the workings of markets

economics (6)

the study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants

4 FOPs (7/8)

• land

• labour

• capital

• entrepreneurship

opportunity cost (8)

the value of the next best alternative that must be given up or sacrificed in order to obtain something else

free good (9)

any good that ins’t scarce, and therefore has zero opportunity cost

basic economic questions (10)

• what/how much to produce

• how to produce

• for whom to produce

rationing (13)

• a method used to apportion or divide something up between its interested users

• the method used to make resource allocation and output/income distribution decisions

• two types: price and non-price rationing

free market economy (13)

uses price rationing to make resource allocation and output/income distribution decisions

planned economy (13)

uses non-price rationing to make resource allocation and output/income distribution decisions

production possibility curve (or frontier) — PPC (15-19)

represents all combinations of the maximum amounts of two goods that can be produced by an economy, given its resources and technology, when there is full employment of resources and efficiency in production

All points on the curve are known as production possibilities

why can’t an economy produce outside its PPC? (16)

because of scarcity

with its fixed quantity and quality of resources and technology, the economy cannot move to any point outside the PPC

leakages in circular flow of income model (21)

• household savings

• taxes

• imports

injections in circular flow of income model (21)

• investment

• government spending

• exports

open economy (22)

economy has international trade with imports and exports

closed economy (22)

economy has no international trade with imports and exports

structure of circular flow of income model (no leakages and injections) (20)

Markets:

• resource markets

• product markets

Economic decision makers:

• households (consumers)

• firms (businesses)

structure of circular flow of income model (with leakages and injections) (21)

imports (21)

goods and services produced in other countries and purchased by domestic buyers

exports (21)

goods and services produced domestically and purchased by foreigners

positive economics (23)

based on positive statements, which are about something that is, was or will be.

“the unemployment rate is 5%”

“a higher price of apples results in fewer apples purchased”

“unemployment will increase next year”

normative economics (23)

based on beliefs and values.

“the unemployment rate should be lower”

“health care should be available free of charge”

refutation (27)

to contradict it, disprove it or show it to be false

Adam Smith (32/33)

• wrote The Wealth of Nations 1776

• father of economics

• laissez faire - let it do / a free market without government intervention

Jeremy Bentham (33)

founder of utilitarianism

“it is the greatest happiness of the greatest number that is the measure of right and wrong”

Karl Marx (35)

• wrote Das Kapital in 1867

Say’s Law (35)

supply creates its own demand, a theory that claims that the economy tends toward full employment in the absence of any government intervention

John Maynard Keynes (36/37)

• wrote The General Theory in 1936

• according to Keynes, wages are ‘sticky’, meaning that can’t change easily

circular economy (38)

goods should be produced in such a way that they can be repaired rather than thrown out. In addition, they would be made out of biological materials so that once discarded they can go back to the biosphere and prevent pollution of the planet