Introduction to Economics

Luke, Year 12, Unit 1

Opportunity Cost

The next best alternative forgone/given up when an economic decision is made. the TRADE-OFF.

Scarcity

The situation in which the available resources - factors of production - are finite, whereas human needs and wants are infinite.

Basic Economic Questions and Principles

What to produce, how much of it, and for whom?

PPC (Production Possibilities Curve)

A model to illustrate the maximum output combinations of two goods that an economy can achieve using its available resources efficiently.

What does the PPC demonstrate?

Scarcity, Opportunity costs, efficiency, and choice

Positive Economic Statements

An economic statement that can be scientifically tested and proved, describing and analyzing economic relationships, and making factual claims.

Normative Economic Statements

An economic statement that cannot be tested or proved, often subjective, and concerned with how things should be. Judgments about an economy.

Point Inside the PPC

Resources are not being fully utilized and are being used inefficiently.

Point on the PPC

Full employment of all resources and efficient.

Actual Output

Inside the PPC, the real, current amount of goods and services an economy produces.

Potential Output

On the PPC, the maximum sustainable output an economy can produce at full employment

Constant Opportunity Cost

There is a constant opportunity cost whether you move points A, B, C, etc. The gradient is the same everywhere.

Increasing Opportunity Cost

A rising amount of one good is given up to produce more of another.

Four Factors of Production

land, labor, capital, entrepreneurship

Shifts in the PPC: Outward Shift

Indicates economic growth and increased potential output (due to technological advancements, new resource discovery, expanding workforce, etc.)

Shifts in the PPC: Inward Shift

Indicates economic decline and reduced production capacity (due to war, natural disaster, fewer people, etc.)

What assumptions does the PPC make?

Only two goods are produced, resources are fixed and fully and efficiently employed, and technology remains constant.

Circular Flow of Income

An economic model that pictures income as flowing continuously between businesses and consumers (households and firms)

Circular Flow of Income: Problems with the Model?

Leakages and Injections

What are leakages?

Taxes, imports, savings.

What are injections?

Government spending, exports, investments

What does the Circular Flow of Income show?

Interdependence between households and firms

Actual Growth

Resources are used more efficiently inside the PPC

Potential Growth

Expansion of economic Output

Centrally Planned Economies

An economic system in which the government controls and regulates production, distribution, prices, etc. The government makes decisions about what to produce, how to produce, and for whom.

Free Market Economies

A free market economy is an economic system where private parties determine the production of goods and services based on supply and demand, with minimal government intervention. The interaction between buyers and sellers determines prices; private ownership is a key factor.

Mixed Economies

A mixed economy is an economic system that blends aspects of both capitalism and socialism, allowing both private businesses and government to participate in economic decision-making.

Disadvantages of Free Market Economies

1. Demerit goods (things that are bad for people, drugs, child prostitution) will be over-provided, driven by high profit motive and high prices.

2. Merit goods (education, healthcare, etc.) will be underprovided since they will only be produced for those who can afford them.

Disadvantages of Centrally Planned Economies

1. Government dominates - loss of personal liberty

2. Lack of Innovation due to suppressed competition

3. Governments do not share the same aim as the majority of the population, which could lead to corruption

4. Inefficiency

Monopolies

A monopoly is a market structure where a single firm or entity controls the entire supply of a product or service, leading to a complete absence of competition and giving the monopolist the power to dictate prices and quality.

Incentives

A reward or punishment that motivates a person or organisation to change their behaviour or take a particular action.

Economic Well-Being

Economic well-being is a state where individuals and communities have sufficient financial security and resources to meet their present and future needs, achieve goals, absorb financial shocks, and maintain a high quality of life

What is output in economics?

the quantity and quality of goods and services produced by a firm, industry, or economy over a specific time period