Topic 1 - Introduction to Economics

Scarcity

Limited availability of resources or factors of production

Factors of production

Land, Labour, Capital, Entrepreneur

Land (explain)

resources on planet

Labour (explain)

human input

Capital (explain)

manmade resources used to produce other goods and services

Entrepreneur (explain)

ability to bring the other factors together to produce goods/services, organize production and take on the risk

Opportunity costs

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

Economic goods

goods or services that have a cost

Free goods

resources that are unlimited

Resource allocation

assigning available resources or factors of production to specific users

PPC

production possibility curve

PPF

production possibility frontier

What is does PPC show

maximum combination of goods and services that can be produced by an economy (in a given time period) if all resources in the economy are being used fully and efficiently and the state of technology is fixed. Ceteris Paribus

To produce the greatest amount of output (PPC) …

• all resources must be fully employed

• all resources must be used efficiently

If point is inside the PPC curve, it is an …

inefficient use of resources

If point is outside the PPC curve, it means …

there are not enough resources to produce the desired output

Types of PPC shifts

• inward shift

• outward shift

Causes for inward shift (PPC)

• war

• natural desasters

Causes for outward shift (PPC)

• Improvement in quality or quantity of factors of production

Consequences of inward shift (PPC)

• no full employment of resources

• under utilizing factors of production

• Inefficient

• Unemployment

• Recession

Consequences of outwards shift (PPC)

• Economic growth

• Increased factors of production

• Improved productivity

• Specialization

Leakages in an economy (definition)

withdrawal of money from the economy

Injections in an economy (what is it?)

introduction of income (outside households and businesses)

Examples of leakages

saving, import, taxes

Examples of injections

investment, export, government spending

banking sector

savings and investments

saving (banking sector) explain

part of consumer income that is not spent, therefore saved

investing (banking sector) explain

spending by firms for the production of capital goods

Government sector

taxes and government spending

Market (definition)

A place where people come together to buy and sell goods

Examples of market

• Physical place or virtual place

• Physical meeting or virtual meeting

• Local, National, Worldwide

Product market

market for goods and services

Factor market

market for labour

Financial market

foreign and stock exchange market

Demand (definition)

quantity of a good or service that consumers are willing and able to buy (at a given time + price)

ceteris parabus

“all else equal” all factors remain constant

Law of demand

• price goes up, demand goes down

• price goes down, demand goes up

demand (type of relationship)

always negative

Individual demand

the demand for a good or a service by a single consumer at a particular cost and at a specific point in time

Market demand

The sum of all individual demands for a good or service at a particular cost and at a specific point in time.

What causes a movement along the demand curve?

changes in price

What factors causes a shift in the demand curve?

• income

• preferences and tastes

• price of other products

• complementary goods

• unrelated goods

• number of consumers

normal goods (definition + what type of shift is caused)

goods whose demand increases when income increases (causes a shift to the right)

Inferior goods (definition + what type of shift is caused)

“house brands” usually cheaper (sinas and fanta), when income increases demand decreases (causes shift to the left)

Substitute goods

goods with similar characteristics (pepsi and cola)

Compliment goods

goods which are consumed together (tennis ball and racket) (P1 goes down, D2 goes up)

unrelated goods

goods that dont affect each other

velben goods

luxury goods

Supply

Quantity of a good or service that producers are willing to offer for sale (at a given price during a specific time period)

Law of supply

Positive relationship between the quantity of a good supplied in a relation to price

• price increases = supply increases

• price decreases = supply decreases

Determinents of supply

• changes in price will cause a movement along the supply curve

• changes in non-price determinants will cause a shift in the supply curve

non-price determinants for supply curve

• input prices

• technology

• future expectations

• number of sellers