Introduction + 1.1 Economic Problem

1

Ceteris Paribus

Positive statement

Normative statement

all else being equal (depends on other factors)

Positive - Factual and can be verified/proven or refuted through further investigation

Normative - based on opinion and is a value judgement and so can’t be verified through investigation + facts

the economic problem?

Economic resources are finite; Wants are unlimited —> insufficient resources to meet unlimited wants, so economic agents (households, firms govt.) need to make choices

.- the basic economic problem: choices regarding What, How and for Whom to produce

Opportunity Cost + extra

“the next best alternative forgone when an economic decision is made”

All economic decisions involve the use of scarce resources, so a choice is made which involves sacrificing an alternative.

an opportunity cost is the ‘true’ cost of an economic decision

Economic goods are…

…scarce (limited resources have been used in their production) —> an opportunity cost associated with producing them (Contributes to economic problem)

Free goods?

Don’t use up scarce resources —> no opportunity cost associated with production of them.

Note: doesn’t necessarily mean though its offered at zero price.

FoPs:

CELL definitions (Renewable + non definitions; human capital)

Land - all natural resources that can be used in the production of g+s (eg. Actual land, forests, minerals, rivers, wildlife)

• Renewable and Non-renewable resources - can or can’t be replenished once used

 

Labour - all human effort (physical and mental) that’s used in the production of g+s

• Human capital refers to the knowledge embodied in a worker from education/training

 

Capital - human-made goods that are used to produce other g+s

 

Enterprise - entrepreneurs are risk-takers who organise the other FoPs; are profit-driven risk-takers (eg. To start a business - involves risk of borrowing or investing money)

Roles/Objectives of the 3 Economic agents. Factor payments?

HOUSEHOLDS

• as consumers, they purchase g+s to consume from FIRMS (producers) seeking to maximise utility (satisfaction)

• are providers of FoPs so receive factor payments from FIRMS

• (are also owners of enterprise and land (natural resources) used in production)

  

FIRMS

• As producers, they produce g+s using FoPs, seeking to maximise profit

• Need FoPs from HOUSEHOLDS, so rewards households with factor payments

 

GOVT

• Regulates economic activity seeking to maximise social welfare: imposes regulations on consumers and producers; Also uses taxation and Govt spending to influence/regulate economic activity

Factor payments:

• Rent: reward for Land

• Wages: reward for Labour

• Interest: Capital

• Profit: Entrepreneurs for risk-taking