1.1 What is economics?

Social science

A study of people in society and how they interact with each other

Economics

Economics is the study of how scarce resources are allocated to fill the wants and needs of consumers.

Opportunity costs

the value of the next best alternative forgone, when making a choice.

Economic Models

Economic models are simplified representations of reality that show the relationship between economic variables. They are used by economists to explain, predict, and analyse economic behaviour and outcomes.

Microeconomics

Microeconomics is the study of individual decision-making units (such as households, firms, and markets) and how their choices affect the allocation of resources, demand and supply, and prices. It also looks at how government intervention influences consumption and production

Macroeconomics

is the study of the economy as a whole, focusing on aggregate variables such as economic growth, unemployment, inflation, and trade. It examines how government policies (fiscal, monetary, and supply-side) are used to achieve macroeconomic objectives and how the economy interacts with the rest of the world.

Fiscal policy

Government use of taxation and government spending to influence aggregate demand and achieve macroeconomic objectives (e.g., growth, low unemployment).

Monetary policy

The central bank’s use of interest rates and money supply to influence aggregate demand, investment, and inflation, in order to stabilise the economy.

Supply-side policies

Government policies aimed at increasing productive capacity and efficiency of the economy by improving factors of production (e.g., education, infrastructure, deregulation).

Scarcity

since resources are scarce, economics is a study of choices. It is clear that not all needs and wants can be satisfied; this necessitates choice and gives rise to the idea of opportunity cost. Economic decision-makers continually make choices between competing alternatives, and economics studies the consequences of these choices, both present and future

Efficiency

Efficiency is a quantifiable concept, determined by the ratio of useful output to total input. Allocative efficiency refers to making the best possible use of scarce resources to produce the combinations of goods and services that are optimum for society, thus minimising resource waste

Intervention

intervention in economics usually refers to government involvement in the workings of markets. There is often disagreement among economists and policymakers on the need for and extent of government intervention. There is a considerable debate about the merits of intervention versus the free market

Change

the economic world is continuously changing, and economists must adapt their thinking accordingly. Economics focuses not on the level of the variables it investigates but on their change from one situation to another. There is continuous and profound change at institutional, structural, technological, economic and social levels

Choice

since resources are scarce, economics is a study of choices. It is clear that not all needs and wants can be satisfied; this necessitates choice and gives rise to the idea of opportunity cost. Economic decision-makers continually make choices between competing alternatives, and economics studies the consequences of these choices, both present and future

Sustainability

is the ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs. It refers to limiting the degree to which the current generation’s economic activities create harmful environmental outcomes involving resource depletion that will negatively affect future generations

Equity

in contrast to equality, which describes situations where economic outcomes are similar for different people or different social groups, equity refers to the idea of fairness. Fairness is a normative concept, as it means different things to different people. The degree to which markets versus governments should, or are able to, create greater equity or equality in an economy is an area of much debate

Interdependence

individuals, communities, and nations are not self-sufficient. Consumers, companies, households, workers, and governments, all economic actors, interact with each other within and, increasingly, across nations in order to achieve economic goals. The greater the level of interaction, the greater will be the degree of interdependence

Economic well-being

is a multidimensional concept relating to the level of prosperity and quality of living standards enjoyed by members of an economy. It includes present and future financial security, the ability to meet basic needs, the ability to make economic choices permitting achievement of personal satisfaction, the ability to maintain adequate income levels over the long term

Factors of production

are the resources used to produce goods and services: Land, labour, capital and enterprise

Basic economic problem

There are finite resources available in relation to the infinite wants and needs that humans have, due to the problem of scarcity, choices have to be made by producers, consumers, workers and governments about the best (most efficient) use of these resources

Economic agent

Economic agents are decision-making units in an economy, such as consumers, producers, the government, and special interest groups (e.g. environmental pressure groups or trade unions) Any economic system aims to allocate the scarce factors of production

The Three Questions

What to produce? How to produce? Who to produce it for?

Production possibilities curve

The Production Possibility Curve (PPC) is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services

Assumptions of a PPC

Only two goods are produced, scarcity of resources exist, production is efficient, the state of technology is fixed.

Constant opportunity cost

Constant opportunity cost occurs when all of the factors of production used to produce one good can be switched to producing the other good without any loss/wastage of resources. One unit given up one of good results in one unit gained of the other

Increasing opportunity cost

Increasing opportunity cost occurs when the factors of production cannot be perfectly switched between the two products. One unit given up of one good results in less than one unit gained of the other

Economic growth on a PPC graph

Economic growth occurs when there is an increase in the productive potential of an economy. This is demonstrated by an outward shift of the entire curve. More consumer goods and more capital goods can now be produced using all of the available resources

Economic decline on a PPC graph

Economic decline occurs when there is any impact on an economy that reduces the quantity or quality of the available factors of production

Circular flow of income

The circular flow of income is an economic model that illustrates the money flows in an economy and shows the interdependence between economic agents

Injections

Injections add money into the circular flow of income and increase its size, for example: Increased government spending, Increased investment, Increased exports

Leakages

Leakages (withdrawals) remove money from the circular flow of income and reduce its size, for example: Increased savings by households, Increased taxation by the government, Increased import purchases

Demerit goods

a good or service whose consumption is considered harmful to the consumer and society