Introduction to economics 1 (copy)

Microeconomics:

A branch of economics which studies the behaviour of individuals and firms in particular markets

Macroeconomics:

A branch of economics which studies the behaviour of the government and the economy as a whole

What type of science is economics?

Social science - studies the behaviour of individuals and societies when allocating scarce resources to meet unlimited needs and wants

The basis of the study of economics:

microeconomics and macroeconomics

The nine central concepts of the economics course:

Well-being

Interdependence

Scarcity

Efficiency

Choices

Intervention

Change

Equity

Sustainability

Define Factors of Production

refers to the resources required to produce goods and services

Factors of Production:

Capital

Entrepreneur

Land

Labour

Define the factors of Production

Capital - man-made resources

Entrepreneur - the skill of organising the three other factors of production

Land - natural resources

Labour - human resources (workers)

What are factors of income?

Factor income is income received from the factors of production

What is the factor of income for capital?

interest

What is the factor of income for Entrepreneur/enterprise?

Profit

What is the factor of income for land?

Rent

What are the 3 basic economic questions?

1. What how much to produce?

2. How to produce?

3. For whom to produce?

What is the process of the circular flow of income?

1. households provide resources to businesses

2. firms provide income to households

3. firms use the resources to produce goods and services for households

4. households provide expenditure (spend money) to businesses

5. the cycle repeats

What does the circular flow of income show?

the interaction between households and firms

Why is this model over-simplified? What are the assumptions made?

There are no injections or leakages:

• only 2 economic agents

• no gov intervention (tax/gov spending)

• no financial sector (savings/investments)

• no foreign economics involved (trade= imports

  /exports)

1. What is a leakage in the circular flow of income?

2. What is an injection into the circular flow of income?

1. refers to the withdrawal of money from the circular flow of income

2. refers to the additional money added into the circular flow of income

what does sustainability mean?

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

Why do threats to sustainability arise?

because of scarce resources

Why must choices be made on how to allocate scarce resources?

Because there are limited resources but individuals/societies have unlimited wants

What are the 3 type of economic systems? + explain each

Free market economy —> allocation of resources determined by market forces, less/little gov intervention

Mixed economy —> allocation of resources is determined by consumers, producers and the goverment

planned economy —> allocation resources determined by the goverment

Define opportunity cost

the value of the next best alternative forgone when a choise is made

What are free goods? + 4 examples

They’re naturally abundant with unlimited supply and therefore do not incur any opportunity costs e.g. air, sunlight, sea water and desert sand

What does the production possibilities curve model illustrate?

The different combination of two goods or services that economy/firm can produce

What are some assumptions of the model?

• fixed amount of resources

• only two goods are being produced

• technology and production techniques are fixed

• all resources are used efficiently

What do the points A B C D and E means?

When is the PPC curved and when is it a straight line?

curve = different resources

straight = resources are constant/the same/only one resource

Actual growth: When does an economy move closer to the PPC?

When unemployment decreases, and efficiency decreases

When can an economy’s PPC shift outwards?

• increase in QUANITITY of resources

• and improvement in the QUALITY of resources

• an improvement in TECHNOLOGY

What does economic methodology refer to?

the ways in which economist study the discipline

What is positive economics?

• statements that can be tested/accepted/amended based on evidence/refuted (facts)

• focuses on what is/was/will be

• explains how economy works

• relies on scientific methods (logic, hypotheses, models, economic theories, emperical evidence)

What is normative economics?

• subjective value judgements that often form the basis of economic policy making

• focuses on what SHOULD be

• considers how the economy SHOULD work

• relies on personal perspectives, values and beliefs

What is Equity and does it fall under normative or positive economics?

refers to the state of being fair

Normative concept as it is subjective

What is equality and does it fall under normative or positive economics?

refers to the state of being equal with respect to something

Positive concept as it is objective

What does positive economics use?

• logic and reasoning (for future predictions)

• hypotheses, models, theories (for future predictions)

• empirical evidence/evidence you measure (to support or refute claims)

• ceteris paribus assumption

What is ceteris paribus assumption?

• ‘other things are equal/stay the same‘

• economists can analyse how one variable may affect another, without considering all the other factors that may affect the dependent variable