Intro to economics

Define economics

A social science focusing on interdependence and the management of scarce resources

Explain the basic economic problem

Scarcity creates choice and opportunity cost

Name the six real world issues

1. What choices do producers and consumers make to meet economic objectives?

2. When do markets fail to meet economic objectives and does gov. intervention help?

3. Why does economic activity vary and why is it significant?

4. How do govs. manage economics and use policies?

5. Who gain and lose thanks to economic policies implemented in real life?

6. Why is economic development important?

Why are resources scarce?

Finite supply

What are the nine central concept (WISE ChoICES)?

Well being, Interdependence, Scarcity, Efficiency, CHOices, Intervention, Change, Equity, Sustainability

Outline scarcity

Excess of human wants over what can actually be produced. Human wants are unlimited while resources are limited.

Outline Choices

Resources are scarce so not all wants can be satisfied. So, societies have to choose between which and how much goods and services to produce. Choices over competing alternatives and their consequences.

Outline efficiency

Scarce resources must be used in the best way possible to produce optimum combinations of goods and services

Outlines equity

Giving every individual equal opportunity - the same starting points and options

Outline economic well being

Living standards (financial security, meeting basic needs, making rational economic decisions, maintaining these over time)

Outline sustainability

Ability of the present generation to meet needs without compromising future generations

Outline change

The change of economic variables from one situation to another

Outline interdependence

The actions of economic agents affecting each other / having consequences that other agents feel.

Outline intervention

Government involvement markets despite market forces being considered best to regulate the economy. Failing markets allow for gov. intervention.

Name the FOPs (factors of production)

Land (natural resources), Labour (employees), Capital (machinery), Enterprise (managing other FOPs)

Name the rewards (income)

Land - Rent (ownership of land), Labour - Wages / Salaries (payment for work), Capital - Interest (borrowing money for investment), Enterprise - Profit (remaining after cost of production is accounted for)

Define goods

Tangible items that can be bought, produced, and sold

Define services

Intangible items provided by firms and bought by customers

Define wants

Good and services deemed unnecessary for human survival but desired

Define needs

Essential goods needed for human survival

Define opportunity cost

The cost of an economic decision (the best alternative forgone)

Define free good

products naturally abundant in supply, therefore no value assigned to their production / consumption

Outline the relation between opportunity cost and free goods

Free goods have no opportunity cost because there is no value in producing and consuming them

Define free market

A market relying on forces of demand and supply to ac

allocate scarce resources (minimal gov. intervention)

Define planned economy

Government / public sector allocates scarce resources

Mixed economy

The government / public sector only intervenes to fix perceived economic failures - Some resources are controlled by the private sector and others by the public sector

What does PPC stand for?

Production Possibilities Curve

What does the PPC represent?

The maximum combination of 2 products that an economy can produce when all resources are used efficiently per the time period

What does a point on the curve represent?

All resources being used efficiently (POTENTIAL OUTPUT)

All FOPs are always fully used (full employment)

What does a point inside the curve represent?

Not all resources are used efficiently (ACTUAL OUTPUT)

What does a point outside the curve represent?

This isn't possible due to current technical / resource availability

What does the shift of a point from inside to on the curve represent?

ACTUAL GROWTH

Increased production of both goods

Increase in efficiency

How does opportunity cost change with this shift?

Opportunity cost does not change

What does the downwards slope of a PPC represent?

Opportunity cost - that to make more of one good another must be given up

What does the PPC curve being concave to the origin represent?

Increasing opportunity cost

What assumptions are made when analysing a PPC?

There are fixed production possibilities

There is scarcity

Technological state is constant

There is allocative efficiency

What does a PPC with a straight curve represent?

Constant opportunity cost for both products presented

What is the PPC curve?

The Marginal Rate Of Transformation (MRT)

Analyse an increase in production of one of the goods on the PPC. A shift ON the curve.

The opportunity cost of producing more of good A is the decrease in production of good B. Increased amount of A is produced at the expense of B as the economy moves from one point on the curve to the next.

Supply of FOPs is fixed due to their limited amounts (scarcity). This limits production at any given time. This is shown by the maximum points on each axis where the PPC crosses.

Choosing to produce more of one product means indirectly producing less of the other. The government then has to chose which product they prioritise, how to allocate scarce resources, and how to use tax revenue

Define Pareto Efficiency

The point on the curve where it is impossible to make one party more better off through reallocating resources without worsening the other party. Both parties have the best allocation of resources.

What is needed for an outwards shift of the PPC curve due to economic growth?

An increase in production capacity, quantity, quality, or existing resources

Give examples of these increases

- more workforce education / training

- innovation

- investment

- FOP discovery

- new technology

- population growth

- immigration of skilled workers

- freer / fairer international trade

What does a shift from curve 1 to an expanded curve represent?

Expansion of the PPC (POTENTIAL GROWTH)

Why would the PPC contract?

Due to a decrease in production capacity

Give 2 examples of decreases in productive capacity

- Major natural disasters

- War

What is the circular flow of income?

How economic activity and national income are determined based on decisions makers' interactions

List the Injections of the business cycle (J)

G - government spending (gov)

I - investments (bank)

X - exports (overseas)

List the Leakages of the business cycle (W)

T - taxes (gov)

S - savings (bank)

M - imports (overseas)

Who are the economic agents in the business cycle? What are their roles?

households: provide labour, get incomes, want to maximise utility

firms: use FOPs to produce goods + services, want to maximise profit

government: raise tax revenue to fund gov. spending, want to maximise social welfare

What is the equation for national equilibrium?

S + T + M = G + I + X

(savings + taxes + imports = gov spending + investment + exports)

W = J

leakages = injections

What is positive economics?

The study of economics that is provable / objective

Define ceteris paribus

All else is unchanged - used to examine the effects of a single variable

What is normative economics?

Opinions and points of view. A statement about what should be or whether something is good or bad.

What did Adam smith establish and in what century?

- The invisible hand (free market + market forces regulate the economy)

- Laissez - faire (minimal government intervention)

- 18th century

What concepts were developed in the 21st century?

- Behavioural economics

- Sustainability

- The circular economy (goods and cervices are made so that they can be broken down in nature or reused - have minimal waste)

What type of economics and concepts were developed in the 19th century?

- Classical economics

- Utility

- The equilibrium approach

- Say's law (supply creates demand)

- Marxist criticism (wealth is created by production not consumption)

Who stressed the concept of government intervention? When?

- John Keynes

- The 20th century after the great depression

What concept also emerged in the 20th century?

Monetarism (neo-classical) (the government creates ore problems than it solves)

Which are short and long run between Keynesian economics and Monetarism?

Keynesian - short run

Monetarism - long run