Chapters 1 + 2

Fundamentals of Economics and its history

nine key concepts

scarcity, choice, intervention, change, interdependence, sustainability, economic well-being, efficiency, equity

scarcity

exists due to stuggle between finite resources and infinite human wants/needs

goods

tangible, physical objects

services

intangible, produced using resources

choices

made by all economic agents

economic agents

part of the economy, a consumer / producer / government

choices of economic agents

consumers decide what to buy, producers decide what + how to produce, government decides on resource allocation

opportunity cost

• next best alternative when an economic choice is made

  • what you give up to gain something else

  • never monetary -> always a good / service

trade-off

when you choose something you trade having something else

interdependence

decisions of different groups within an economy and how they affect each other

government intervention

government intervention may occur in an economy to control or influence the economy

chain of economics

scarcity of resources → choices → opportunity costs + trade-offs → influenced by interdependence

free good vs economic good

free good is in abundance and has no scarcity, economic good is scarce and has opportunity cost

planned / centrally planned economy

decisions controlled by government, gov controls all FoPs, system requires extensive planning of resource allocation

free market system (capitalism)

decisions made by private stakeholders (consumers + producers), depends on supply and demand (self-shifting system), (theoretically) no gov intervention

micro vs macro

micro focuses on smaller economic agents (consumers + producers), macro focuses on factors affecting economy as a whole

factors of production (FoPs)

Capital, entrepreneurship, land, labour

capital

physical capital -> human-made resources used for creation of other goods / services

human capital -> skills / knowledge gained through education / experience

entrepreneurship

leaders who bring other FoPs to create goods / services, generally motivated by profit

land (natural capital)

• natural resources used to produce goods / services

• not equitably shared across nations / people's

labour

person who devotes dedication to a task, usually paid work

payments for FoPs

• Capital → Interest

• Entrepreneurship → Profit

• Land → Rent

• Labour → Wages

ceteris parabus assumption

“all other things are equal“, means under assumption that nothing else changes other than the one factor

positive vs normative economics

positive - describing + analysing, more factual, uses science

normative - opinion based, subjective judgements, biased language

PPC curve

used to show scarcity, choice, opportunity cost and efficiency

assumes all resourses are used efficiently, technology is fixed and employment is maxed

efficiency

resources being used in the best possible way without waste or improvements to be made

potential output

max amount of products that can be produced

growth in production possibility

when the PPC graph shifts and grows outwards

Closed circular economy

• households supply FoPs to firms -> receive money / income

• firms hire FoPs from households -> produce goods / services -> sell to households -> receive income from households

open circular economy

leakages - income leaving domestic economy

injections - income flowing into domestic economy

no reason to assume leakages and injections are equal, but generally desired as economy would be at equilibrium

leakages

• taxes - leave households / firms and go to government

• savings - storing income in financial institutions (banks)

• imports - money spent of foreign goods / services

injections

• gov. expenditure - money spent of public welfare (education, healthcare)

  • gov can spend more than earning to influence leakages / injections (borrow money -> running budget deficit)

• investments - financial institutions lending money to firms (builds capital)

• exports - foreign households / firms buying from domestic market

Adam Smith “invisible hand“ theory

• producers are guided by “invisible hand” to decide what to produce base on consumers wants and needs (not controlled by gov or authority)

• idea that economies are self-regulating

classical economics

• focus on supply 

  • Says law: Supply creates demand (overproduction not possible)

neo-classical economics

• focus on demand + utility of goods

• more mathematical

• theory of marginal utility (Marginal Revolution)

  • extra amount of satisfaction gotten from consuming one more unit of a good / service

Marxist economics

• prioritisation of profit above everything (even fair wages / working conditions)

• gov controls allocation of resources

Keynesian Revolution

• focus on gov. intervention

  • policies that promote economic stability

• theory that during recessions gov should run budget deficits + increase spendings to boost economy

  • resulted in Stagflation (high unemployment + inflation)

Stagflation

massive unemployment and high inflation

monetarism / new classical (20th century)

• focus on supply of money

  • money in economy should grow at same pace as output

  • gov should not manage demand

• came after Stagflation + many failing economies

Modern economics (21st century)

• focus on sustainability

• focus on behavioural economics

  • understanding why + how economics agents make choices

• increased awareness of sustainability + relationship between economy and society

doughnut economics

focus on SDG goals, idea of a min and max production ability due to environmental reasons and production quality