Business Economics - Chp 1

Three Key Economic Ideas

Three Key Economic Ideas

1. People are rational

2. People respond to incentives

3. Optimal decisions are made at the margin

Scarcity

Unlimited wants exceed limited resources (to fulfill the wants of consumers)

Economics

the study of choices people make to attain their goals, given their scare resources

Economic model

simplified versions of reality used to analyse real-world economic applications

Needs

Goods and services essential for life

Wants

Goods and services that are desired to improve the quality of life but are not essential

3 main groups in economy

1. Households

2. Firms

3. Government

Trade-off

Because of scarcity, producing more of one good/service means producing one less of another good/service

Household

• decision-making unit

• consume goods and services

• owners of Factor of Production (FoP) - factor input

Firms

• decision-making unit

• produces goods and services

• buys Factor of Production from Households

Government

• provide framework of Rules and Laws for Household and Firms to operate within

• in some economies, Government is also involved in Production

Rational

using all available information to achieve goals

Optimal decisions are made at the margin

decisions where involve doing a little more or a little less of something

Trade-off - 3 questions

1. What Goods and Services will be produced?

2. How will the Goods and Services be produced?

3. Who will receive the Goods and Services produced?

Productive efficiency

Goods and services produced at the lowest possible cost

Allocative efficiency

production is in accordance with consumer preferences (produces G+S up to the point until the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Positive analysis

• analysis concerned with what is

• facts

• usually come from Government

Normative analysis

• analysis concerned with what ought to be

• slight negative connotation

• can come from people, private sectors (not from Government)

Microeconomics

the study of:

• how Households and Firms make choices

• how H and F interact in markets

• how Government attempts to influence their choice

Macroeconomics

the study of:

• the economy as a whole

• e.g: inflation, unemployment, and economic growth

Factors of Production

C - Cell

E - Entrepreneur

L - Labour

L - Land

Factors of Production

• produce Goods and Services

• Economic Resources

Capital

• tools, equipment, factories used in production

• man-made resources

• physical capital or human capital

Entrepreneur

• individuals who start a business/ bring a new product to market

• founder

• innovates/organise ideas/business strategies

• ensures the production process (FoP) are running smoothly

Land

• natural resources

• gifts of nature

• not created by human effort

• land (literal)

• e.g: water, timber, oil,

Labour

• people with all their effort and abilities

• human resources and effort

• physical effort