ECONOMICS 1.1

Economics definition

The study of choices and allocation of resources

Microeconomics

Economics only for individuals or companies in a specific market within the country

Macroeconomics

The study of a countries whole economy

Equity

Fairness in distribution of resources which varies from individual and societies

(everyone gets the resources they deserve rather than the exact same)

4 Factors of Production

1. Land

2. Labour

3. Capital

4. Enterprise

Explain land

Land is any natural resource that is used to make g/s

Explain Labour

The physical and emotional effort or input of humans to make the g/s

Explain capital

Any man-made assets such as machinery used to make the g/s

Explain enterprise/entrepreneurship

A special unique ability that only some humans possess.

Interdependence

Different people in an economy rely on each other such as producers and consumers. Their actions impact each other

Scarcity

Limited resources for unlimited wants

Opportunity cost

value of next best alternative that must be given up/sacrificed when an economic decision is made

Physical capital

Man-made inputs to produce greater ouput

Human capital

skills, knowledge, education and training that a human possesses to produce even greater output

Natural capital

Everything included in land and any additional natural resources occuring in the enviroment

3 basic economic questions

What is produced?

How is it produced?

Who is it produced for?

Government intervention

When the government intervenes in an economic market to achieve a specific outcome

example: subsidisation, regulating policies

Free market economy

Economic choices such as production and resource allocation are determined by supply and demand by buyers and sellers, with no government intervention.

Market approach + price rationing

Planned economy

the government determines the three economic questions and allocates resources itself. This uses command approach where the government determines who gets resources based on non-price rationing.

Mixed economy

Mix between government intervening in who receives resources and free market economy where consumers and producers determine who receives resources based on whether they can afford it.

Market approach

Letting producers, businesses and consumers determine the allocation of resources based on profit, revenue and affordability.

Command approach

The government determines who receives resources based on non-price rationing.

Price Rationing

Determining who can buy goods and services based on whether they can afford to purchase it

Non- price rationing

Other factors aside from price determining who can have the good based on whether they can afford to buy it

eg: lottery

3 things whether it is a free market economy or planned economy is on

1. Rationing

2. Economic questions (decision making)

3. Resource ownership (priv/public)

What good is scarce and what is not?

Free good= not scarce, unlimited resources

Economic good= scarce, limited resources

Economic Problem

Resources are scarce but there are unlimited wants

PPC/PPF full name

Production possibilities frontier or curve

What does the PPC show

all combinations of maximum amounts of 2 goods that can be produced

Ceteris Paribos

All other things exact for factors that are changing remain the same

Assumptions in PPC

1. fixed resources (quanity and quality fixed)

2. Interchangeable (can give up one alternative to gain more with no other cost)

3. only 2 alternatives /ignore all other)

Straight line in PPC

constant opportunity cost

Non-linear line in PPC

increasing opportunity cost

What does constant opportunity cost mean?what does it mean for resources?

There is always a constant trade off between the two. You lose the same ratio so for example if you gain 5 more bikes you always lose 2 more cars.

CONSTANT RATIO

5 bikes: 10 cars

10 bikes: 8 cars

15 bikes: 6 cars

This means resources are perfectly adaptable. So the exact same resources for bikes and cars, the same workers that produce bikes can also produce cars.

Increasing opportunity cost

This means that the opportunity cost changes. Even when bicycles increase by 2, cars can increase by 3 number. When bikes increase by 4, cars increase by 7. No fixed ratio.

This means when one good A is produced more, the opportunity cost increases even more by a bigger ratio as even less of good B can be produced.

Resources are not inter-changable. Bikes and cars do not have the exact same parts and workers that do bikes cant do cars. Ther

Features of the model (what key economic concepts are demonstrated- 5)

1. opportunity cost- shows us the value fo the next best alternative which we are sacrificing

2. scarcity- not all the goods can be produced as there are limited resources to produce the goods

3. Choice- because of scarcity, we have to choose where to position ourselves on the PPC

4. Unemployment- points inside PPC shows unemployment or lack of training as it means the industry is not performing to its maximum productivity or capability

5. efficiency- the PPC represents the maximum productivity meaning there is no wastage

How is actual growth represented in the PPC?

Moving the point inside the graph

How is growth in production possibilities represented in the PPC?

Moving the entire graph outwards

what is an outward shift in the PPC called?

economic growth

what is an inward shift in the PPC called?

economic contraction

Productive efficiency

Make output at lowest unit cost

Allocated efficiency

Make things based on demand (what people want)

How to improve the production possibilities (PPC outwards)?

Increase quantity of resources, increase training of workers, tech improvements, better management = increase abillity to produce more