Economics as a Social Science

• Economics studies human behavior in the context of individuals, firms, and governments. 🌍

• Basic needs for survival include food, water, shelter, and clothing. 🍎💧🏠👚

• Human wants are unlimited while resources are limited, leading to the concept of scarcity. 💡

• Scarcity is defined as the gap between limited resources and unlimited wants. 📉

• The fundamental economic problem of scarcity necessitates making choices, leading into opportunity cost. 🤔

Opportunity Cost

• Opportunity cost is defined as the best alternative foregone when a choice is made. ❌

• It can also be seen as the loss of other alternatives. 📉

• For example:

  • Choosing to study economics instead of physics has an opportunity cost of not studying physics. 📚➡🔬

  • Increasing teacher salaries may cause a loss in the provision of free meals for students. 👩‍🏫➡🍽

• Consequences of making choices include:

  • Uneven distribution of resources (e.g. you cannot do half a course) ⚖

  • Decision-making mechanisms, such as cost-benefit analysis, that assesses the positives and negatives of choices. ✅❌

  • Potential unhappiness among stakeholders affected by the choice. 😟

Critical Analysis of Opportunity Cost

• Challenges in using opportunity cost:

  • Limited Information: Lack of complete information can hinder understanding costs and benefits. ℹ

  • Resource Constraints: Some resources may have limited alternative uses (e.g. money vs. a skateboard). 💰🛹

Factors of Production

• Economists categorize scarce resources into four factors:

  • Land: Natural resources aiding production (e.g. air, sea, fields). 🌳🌊🏞

  • Labour: Human effort applied in the creation of wealth (e.g. teachers, plumbers). 👨‍🏫👷‍♂

  • Capital: Human-made tools that aid in production (e.g. machinery, tools). 🛠

  • Enterprise: Accepts risks in starting a business (e.g. Collison Brothers, founders of Stripe). 💼🚀

Production Possibility Frontier (PPF)

• The PPF illustrates the trade-offs between production levels of different goods. 🔄

• It reflects the principle of opportunity cost by showing finite numbers of goods/services producible. 📊

• Example of PPF:

  • A country producing 100,000 vehicles and 60,000 machines involves trade-offs: 🚗🤖

  • Point A: 100,000 vehicles, 0 machines.

  • Point B: 0 vehicles, 60,000 machines.

  • Point C: 40,000 machines, 60,000 vehicles.

  • Points A, B, and C are achievable given current resources. Point Y (inside PPF) shows productive inefficiency. Point X (outside PPF) is unachievable. ✅❌

Economic Growth and the PPF

• The PPF can shift right due to: ➡

  • Quantity increase (more workers, factories, investment). 📈

  • Quality improvement (technology, worker skills). ✨

• Conversely, the PPF can shift left due to events like emigration or disasters. ⬅🌪

Problems with the PPF

• Issues include:

  • Not all alternatives may be known. ❓

  • Mismatches between production and societal needs may occur. 🤷

Economic Systems

• Different economic systems answer the basic economic questions:

  • Free Market Economy: Little government intervention (e.g. Hong Kong). 🇭🇰

  • Command Economy: Extensive state control over resources (e.g. North Korea). 🇰🇵

  • Mixed Economy: Combination of free market principles and state intervention (e.g. Ireland). 🇮🇪

Economic Participants

• Four main participants in a market economy:

  • Individuals/Consumers: 👨‍👩‍👧‍👦

  • Buy goods, offer labor for wages, pay taxes, and contribute to NGOs. 🛍👩‍💻💸

  • Businesses: 🏢

  • Utilize factors of production, employ local workers, and pay taxes. 🏭👷‍♂💰

  • Government: 🏛

  • Provides public facilities, manages taxes, and funds social programs. 🛣🏫🏥

  • NGOs: 🌍❤

  • Provide unprofitable social services and enhance community welfare. 🤝

Conflicts Among Economic Participants

• Consumers:

  • Aim for maximum utility within income constraints. 🎯

  • May face conflicts on how to spend their limited income. 🤯

• Businesses:

  • Objectives may extend beyond profit maximization, including market share growth and sustainability goals. 📈🌱

• Government:

  • Generally aims to maximize citizen welfare, faced with competing group influences and potential conflicts in policy. 🕊

• NGOs:

  • Struggle to balance efforts between local and international needs, as well as money management between operational costs and service provision. ⚖🌐

Specialization and Division of Labour

• Specialization occurs when economic units focus on producing a narrow range of goods/services, enhancing efficiency and output. 🎯

• Historical context given by Adam Smith in "Wealth of Nations": 📜

  • Detailed division of production tasks leading to significant increases in productivity. 📈

• Advantages of Specialization: ✅

  • Skill improvement, time savings, increased productivity, cost reductions, and lower marginal costs. 🧠⏱⬆💰⬇

• Disadvantages of Specialization: ❌

  • Monotony, difficulty in filling specialized positions, increased training costs, and potential job unavailability during downturns. 😵‍💫🚫💼📉

Regional Specialization

• Regions can specialize just as firms do:

  • Examples: Japan in cars, Ireland in agriculture, Silicon Valley in tech, etc. 🇯🇵🚗🇮🇪🚜🇺🇸💻

• Benefits include:

  • Increased investment and job creation within specialized regions. ⬆💸🧑‍💻

Cost-Benefit Analysis

• A systematic method of weighing costs and benefits to decide on actions. ⚖

• Applied by all economic participants:

  • Businesses measure marketing costs vs. customer acquisition. 📉📊

  • Individuals assess course costs vs. potential earnings. 🎓💰

  • Governments evaluate infrastructure spending against public benefits. 🏗👨‍👩‍👧‍👦

Types of Costs and Benefits

• Private Costs and Benefits: Direct financial implications for individual firms (e.g. construction costs). 🏢💲

• Externalities: Unintended effects impacting third parties (e.g. noise pollution from a new airport). ✈📢

Government Use of Cost-Benefit Analysis

• Effective for evaluating large projects, considering broader impacts on all participants. 📏

• Steps include:

  1. Identify private and external costs/benefits. 🕵‍♀️

  2. Assign monetary values. 💰

  3. Calculate net costs/benefits. ➕➖

• Importance of cost-benefit analysis:

  • Ensures taxpayer value in government projects and optimal use of scarce resources. ✅🎯

Microeconomics vs. Macroeconomics

• Microeconomics: Examines behavior of individuals/firms in smaller economic units (e.g. market for specific goods). 🍎👨‍👩‍👧‍👦

• Macroeconomics: Studies the overall economy (e.g. national production levels). 🌐GDP

• Role of incentives in economic behavior:

  • Incentives motivate behavior through rewards (e.g. tax breaks). ⭐

  • Regulations enforce compliance with laws, including fines for violations. 👮‍♀📜