1.1 - What is Economics?

Unit 1 - Introduction to Economics

economics as a social science

• studies the behaviours of individuals and societies

• uses the scientific method to model the behaviour of economic agents

microeconomics

• studies the behaviors of individuals and firms in particular markets

macroeconomics

• studies the behavior of the government and the economy as a whole

basic economic problem

• how to allocate scarce resources to satisfy unlimited wants

• What to produce?

• How to produce?

• For whom to produce for?

factors of production

• refers to the resources that are required to produce goods and services

capital

• refers to any machinery or man made resources used in the production of goods or services

• factor income = interest

enterprise

• refers to the skill of organizing the three other factors of production

• factor income = profit

land

• refers to natural resources

• factor income = rent

labor

• refers to human resources

• factor income = wages

factor income

• factor income is the income earned by individuals or households for their contribution to the production process

sustainability

• refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their needs.

scarcity

• Refers to the situation in which there are finite amount of resources, whereas wants are infinite

• Scarcity is a relative concept, therefore it depends on the scenario

  e.g water is scarce in a desert but not in a river.

scarcity & sustainability

• Sustainability refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their needs.

• scarcity is a threat to sustainability

• threats to sustainability arise due to scarce resources.

• therefore, choices on the allocation of our scarce resources allows us to meet our present needs without compromising the ability to meet future needs

  e.g China, US, and India use more fossil fuels than the world combined (>50%), fossil fuels are not renewable, thus the consumption of fossil fuels is a threat to sustainability.

opportunity cost

• the value of the next best alternative forgone when a choice is made

  note that it refers to the next best alternative, therefore if there are multiple options, it refers to the single next best alternative, not the other choices combined

how do opportunity costs arise

• Opportunity costs arise due to the scarcity of resources and the necessity to make choices.

• When resources are limited, stakeholders decide how to allocate these resources among alternative choices.

• Therefore, when a choice is made, the opportunity cost is incurred because resources used for that choice cannot be used for the next best alternative.

economic goods

• resources and products that are limited in supply and have economic value to society, most goods are economic goods.

free goods

• naturally abundant, and the quantity is sufficient to satisfy all human wants, hence does not incur any opportunity costs

free market economy

• allocation of resources is determined by market forces, e.g producers and consumers (private sector)

mixed economy

• allocation of resources is

  determined by

  consumers, producers,

  and the government.

controlled/planned economy

• allocation of resources is determined by the government (public sector)

• Distribution is based on communal needs e.g, a pregnant mother of 10 needs a house more than a single man

• Aims to meet societal needs holistically, rather than maximizing profits like the private sector

• Prices, rations, and quotas are assigned by the government

advantages of the private sector

1. absence of price mechanisms in the public sector

   • price mechs. are systems of feedback and signals which illustrate consumer preferences. therefore resource allocation is not aligned with the public’s best interest

2. profit driven maximisation

   • priv sector has a strong incentive to minimize costs and maximize profits, causing them to be more efficient and innovative

3. competitive pressures

   • forces firms to remain efficient and innovative to meet consumer demands + keep their competitive edge within the market

PPC assumptions

• There is a fixed amount of resources (FOP)

• Assumes that there are only 2 goods available to produce

• Efficiency and production techniques remain fixed or don’t innovate

• All resources are used efficiently

Concave/curved PPC

• Increasing opportunity cost

• Occurs due to specialization.

• Causes it to be harder to change production from good a to b, as they may require different labor skills or machinery (capital)

• Resources are not equally suitable to produce different goods

• e.g farmers and engineers have very different skill sets. To shift from producing more strawberries to producing more cars, the farmers need to learn math and engineering skills, therefore they are less specialized

Linear PPC

• Constant opportunity cost

• Occurs when the products have very similar FOPs.

• "shoe leather costs" may be less pronounced due to the smoother transitions in production as the FOPs for both goods are very similar.

• e.g green apple and red apple farmers have very similar skill sets, therefore if they want to shift to making more red apples and less green apples, the green apple farmers are likely quite specialized already in farming red apples

pareto efficiency

• it is impossible to allocate resources in such a way that makes another party better off without making someone worse off

PPC diagram - pareto eff, max eff, min eff, actual growth, unattainable

• A,B,C are pareto efficiency, max efficiency

• E is unattainable currently

• D is unemployment of resources/inefficiency

• D to B is actual growth

PPC - opportunity cost

• Opportunity cost can be visualized on the PPC 10<x<18

what the ppc represents

• model which illustrates the different combinations of goods and services that a firm or economy can produce