Economics Unit 1

Economics as a social science

The study of people in society + how they interact w/ each other.

human behavior, choices or interactions when consuming.

Microeconomics vs Macroeconomics

Micro: individual choices + single markets (consumer + producers)

Macro: factors affecting national/global economy (inflation)

scarcity

the limited availability of economic resources relative to society’s unlimited demand for goods and services.

choice

Since resources are scarce, not all needs and wants can be satisfied; this necessitates choice and gives rise to the idea of opportunity cost.

efficiency

ratio of useful output to total input

Allocative efficiency: best possible use of scarce resources

equity vs equality

equality: describes situations where economic outcomes are similar for different people or different social groups (Everyone gets same height stool)

equity: refers to the concept or idea of fairness. (different height stools so that everyone is the same height)

economic well-being

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.

• There are broad disparities in economic well-being both within and across nations.

sustainability

 the ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs.

change

The economic world is in a continual state of flux

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.

intervention

government involvement in the workings of markets.

Factors of production:

resources used to produce goods

Factors of production: Land

“natural capital” natural resources

Factors of production: Labour

“human capital” physical/ mental contribution

Factors of production:Capital

“physical capital” human made infrastructure

Factors of production: Entrepreneurship

organizing + risk taking

Opportunity cost

next best alternative forgone when an economic decision is made, what you give up

Free goods

no scarcity, everyone can have unlimited goods

The basic economic questions:

what/ how much to produce?

how to produce?

For whom to produce?

Market versus government intervention

how to manage economic stability, free vs planned market, extent of intervention.

free market economy

consumers and producers make the decisions about production and consumption.

planned economy

decisions about production and consumption made by government.

Mixed economy: public/private sector

public sector: gov. owns specific assets/ industries and provides vital goods (healthcare)

private sector: businesses and individuals own resources, set prices.

almost all economies are mixed

PPC and Assumptions of the PPC

Shows max combinations of 2 outputs in economy in given time.

-economy produces 2 goods

-resources + state of tech are fixed

-resources are fully employed

Positive vs Normative economics

Positive: objective, theory, emperical evidence

Normative: subjective, ought to happen, opinion

ceteris paribus assumption

“all other things being equal” no change in other variables

18th century

Adam Smith and laissez faire

18th century: Adam Smith and laissez faire

“father of economics”, first book of modern economics, backbone of theories.

Believed wealth based on value of good, not gold/silver

laissez faire: capitalist system w/ free markets, little gov. intervention

19th century:

classical microeconomics (utility), The concept of the margin, Classical macroeconomics (Say’s law), Marxist critique of classical economic thought

classical microeconomics (utility)

value of good to a consumer based on its utility to them, believed utility could be measured.

19th century: The concept of the margin

consumers consume based on value of consuming more

producers produce based on extra cost of additional production.

19th century: Classical macroeconomics (Say’s law)

production is source for demand. “supply creates its own demand”

19th century: Marxist critique of classical economic thought

capitalism would break down, communism would be the natural result for the economy.

rise of free markets leads to inequitable distribution of wealth

20th century:

Keynesian revolution, Rise of macroeconomic policy, Monetarist/new classical counter revolution

20th century: Keynesian revolution

demand, not supply determines national income.

gov. has a role in managing total demand.

great depression required gov. intervention

20th century: Rise of macroeconomic policy

Keynesian policies lead to more problems

transformed economics from a study of individual markets into the management of entire national economies

20th century: Monetarist/new classical counter revolution

amount of money determines economic growth, concerned with inflation, more $ produced leads to increased inflation

21st century:

behavioural economics, interdependencies between the economy, society and environment, circular economy

21st century: behavioural economics

humans aren’t always rational/ don’t always make the best decisions when consuming.

21st century: interdependencies between the economy, society and environment

current: disregard for inequalities + destruction of world.

instead of trying to achieve growth and output, we must view the economy as operating within earth’s society and ecosystem.

21st century:circular economy vs linear

circular: products: long lasting, reuse + recycle, regenerative approach

linear: take, make, waste: not sustainable