chapter 1 - what is economics?

What is economics?

is the study of how people allocate their limited resources to satisfy their unlimited wants

Three basic questions

what to produce?, how to produce?, for whom to produce?

Natural resources

are the ‘gifts of nature’ resources such as air, water, minerals, energy resources such as coal and oil, soil and vegetation, anything that is supplied from the natural environment

Human resources

refers to the quantity and quality of the labour force (physical and mental effort applied in the production of a good or service), enterprise (the management of production)

Capital resources

refers to the man made resources which assists human resources in the production of goods and services, for example machinery

Microeconomics

deals with the economic problem from an individual point of view/individual market

Macroeconomics

deals with the economic problem from society’s point of view, it is concerned with the performance of the whole economy

Ceteris parabus

this is the latin assumption ‘all other things constant’

Economic model

is a simplified representation of economic reality showing the relationship between certain economic variables

Postive economics

a positive statement can be proven to be true or false

Normative economics

a normative statement is an opinion or a value judgement

Opportunity cost

is used to represent the real or economic cost of a decision, it should be thought as choosing one thing over the other you give up the option of the other good

Production possibility frontier (PPF)

this model shows all the combinations of goods and services that can be produced by an economy given the available resources and the level of technology, the assumptions of this model include resources are fixed, technology is fixed, the economy produces only two goods

Economic system

is the way in which a country’s resources are allocated to deal with the economic problem, there are three assumptions what and how much to produce, how to produce and for whom to produce

Planned economy

it involves central planning by the government, the government coordinates and plans economic activities to meet specific goals which allows for market mechanisms

Command economy

is an economic system where the government makes all the decisions about production and distribution of goods and services, the government controls resources, sets prices and determines what is produced and how much is produced