1. Introduction to Economics

interdependence

the idea that economic decision-makers interact with and depend on one another: no one is self-sufficient

economic wellbeing

overall levels of prosperity, economic satisfaction, and living standards for the members of a society

scarcity

limited resources are insufficient to satisfy unlimited human wants and needs; factors of production are finite while wants are infinite

choice

decisions made facing the problem of scarcity, producing opportunity costs

efficiency

output: input; maximising output from scarce resources to avoid waste

sustainability

using resources to satisfy current needs without compromising future generations' ability to satisfy their needs

intervention

actions taken by a government to influence or regulate economic activities when markets cannot achieve societal goals by themselves

microeconomics

study of the economic behaviour of individual decision-making entities

macroeconomics

study of the economy as a whole: aggregates of individual decision-making entities

factors of production

resources that are used to make all goods and services

what are the 4 factors of production?

land/natural, labour, capital, entrepreneurship

What are the factor incomes for each of the FOPs

land: rent

labour: wages

capital: interest

entrepreneurship: profit

goods

physical objects that people need and want

services

non-physical activities that people need and want

land resources

all natural resources

labour resources

physical and mental effort that people contribute to the production of goods and services

physical capital

man-made objects used to produce goods and services

entrepreneurship

the people that innovate, take risks, seek opportunities, and run businesses to profit

human capital

skills, abilities, and knowledge acquired by people

3 main questions in economics

What to produce? How to produce? For whom to produce?

Opportunity cost

value of the next best alternative forfeited whenever a choice is made

Economic profit =

revenue - (explicit costs + implicit costs)

implicit cost

opportunity cost

free goods

Goods that are unlimited in supply and which have no opportunity cost

economic goods

goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price

production possibility frontier (PPF)

a curve that shows the maximum combinations of two goods or services an economy can produce given its resources, assuming all resources are fully and efficiently utilised.

Productive/technical efficiency

when goods and services are produced at the lowest possible cost while using all available resources efficiently

What 2 conditions must be met to achieve productive efficiency?

1. Resources are fully employed

2. Resources are used efficiently with waste minimised

Allocative efficiency

When the combination of goods and services produced is optimum for society's wants and needs, hence maximising society's welfare and minimising resource waste

Productive capacity

the maximum output that an economy can produce with available resources

Why might the PPF expand outwards? (this does not mean that there is actual growth)

1. Higher quantity of resources (natural, labour, capital)

2. Increased efficiency (higher resource quality/tech improvement)

What are points inside the PPF?

inefficient use of resources or underemployment of productive capacity

Dynamic efficiency

an economy's ability to change its resource allocation over time according to society's needs and wants

Why is no economy ever likely to produce on the PPF?

1. Productive inefficiency

2. Underemployment of resources

PPF relationship with scarcity

1. Resources and tech are scarce

2. Economy must make choices

3. Choices have opportunity costs

How can a country consume at a point outside the PPF?

Through specialisation (due to comparative advantage) and trade

What 3 shapes can the PPF take and what are the implications?

1. Concave: increasing opportunity cost

2. Constant slope: constant opportunity cost + perfectly adaptable resources

3. Convex: decreasing opportunity cost

Positive economics

the branch of economic analysis that describes, explains, and predicts the way the economy actually works (may be false)

Normative economics

The part of economics involving value judgments about what ought to happen (cannot be true nor false)

ceteris paribus

other variables are assumed to be constant and unchanging

theory

general explanation of interrelated events that can help make predictions

law

a descriptive statement with universal validity that reliably predicts events

model

A simplified representation illustrating key features of a theory or law

economic equality

the idea that each individual should receive the same amount of material goods, regardless of their contribution to society

equity

normative concept regarding the fair distribution of resources within a society, considering individual needs and circumstances

rational decision-making

using logic to maximise utility and satisfaction according to self-interest