1.1 Understand the nature of economics

Understanding the nature of economics

What is economics?

Economics is the study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.

What is microeconomics?

Microeconomics examines the behaviour of individual decision-making units in an economy, particularly consumers/households and firms/businesses, and how their interactions in markets determine prices.

What is macroeconomics?

Macroeconomics examines the economy as a whole using aggregates such as total income, output, employment and the overall price level.

What is an aggregate?

An aggregate is a whole or collection of many individual economic units, such as total consumer spending or total national output.

What is scarcity?

Scarcity is the situation in which available resources or factors of production are finite while wants are infinite, meaning there are not enough resources to produce everything people need and want.

Why does scarcity exist?

Scarcity exists because resources are limited in relation to the unlimited uses people have for them.

Why does scarcity create the basic economic problem?

Scarcity means that society cannot satisfy all wants, so choices must be made about how scarce resources are used.

What is choice in economics?

Choice refers to selecting between competing alternatives because scarce resources cannot satisfy all wants.

What is efficiency?

Efficiency means making the best possible use of scarce resources and avoiding resource waste.

What is allocative efficiency?

Allocative efficiency occurs when scarce resources are used to produce the combination of goods and services that best satisfies society's needs and wants.

What is equity?

Equity is the idea of being fair or just.

What is equality?

Equality is the sameness of treatment or outcomes between people or groups.

What is sustainability?

Sustainability refers to maintaining the ability of the environment and economy to continue producing and satisfying needs and wants into the future.

What is interdependence?

Interdependence is the idea that economic decision-makers interact with and depend on each other to achieve their economic goals.

What is intervention in economics?

Intervention usually refers to government intervention, where the government becomes involved in the workings of markets.

What is an economic good?

An economic good is a good that is scarce and therefore has an opportunity cost greater than zero.

What is a free good?

A free good is a good that is not scarce and therefore has a zero opportunity cost.

What are the four factors of production?

Land, labour, capital and entrepreneurship.

What is land as a factor of production?

Land includes all natural resources, including agricultural and non-agricultural land and natural resources such as minerals, oil, water, forests, rivers and lakes.

What is opportunity cost?

Opportunity cost is the value of the next-best alternative that must be given up or sacrificed to obtain something else.