1.1._Introduction_to_economics_2022 (10)

Introduction to Economics

• Economics is a social science that studies choices made by individuals, businesses, governments, and societies due to the scarcity of resources.

Key Concepts in Economics

• Intervention: Refers to government actions affecting economic activity.

• Scarcity: The condition arising because human wants exceed available resources.

• Choice: The necessity that arises from scarcity, leading to decisions between alternatives.

• Interdependence: The ways different economic agents mutually influence each other.

• Efficiency: The optimal use of resources to maximize output.

• Economic Change: The transformation of economies over time due to various factors.

• Sustainability: Ensuring that resource usage today does not hinder future generations' ability to meet their needs.

• Equity: Pertains to fairness in economic outcomes.

• Well-being: Encompasses the quality of life and economic prosperity of individuals in an economy.

Scarcity and Economic Problems

• Scarcity is defined as the excess of human wants over what can be produced. This imbalance drives economic problems and decisions.

Choice in Economics

• Economic decision-makers continually face choices between competing alternatives, affecting both present and future outcomes.

Efficiency

• Efficiency quantifies the relationship between useful output and total input, highlighting how well resources are utilized.

Understanding Equity

• Unlike equality, which focuses on uniformity in outcomes, equity emphasizes fairness in distribution of wealth and opportunities.

Economic Well-being

• Represents the level of prosperity and quality of living standards experienced by members of an economy, involving various dimensions of economic health.

Sustainability

• Relates to the capacity of current generations to satisfy their needs without compromising future generations' ability to meet theirs, integral for long-term economic strategies.

Change in Economics

• Change is a central element both in theoretical frameworks of economics and the practical scenarios observed in real-world economies.

Interdependence in Economies

• All economic agents — consumers, firms, households, and governments — interact, highlighting the interconnected nature of economic activities.

Role of Intervention

• Government intervention can influence market operations through policies and regulations to steer economic outcomes toward desired objectives.

Distinction between Economics and Exact Sciences

• Economics differs from exact sciences due to:

  1. Varied observation sources

  2. Historical contexts affecting outcomes

  3. Human behavior and choices

  4. Knowledge acquisition through introspection.

Microeconomics vs. Macroeconomics

• Microeconomics: Examines individual households' and firms' behaviors in specific markets.

• Macroeconomics: Focuses on national and global economic dynamics, encompassing broader economic factors.

Positive vs. Normative Economics

• Positive Economics: Describes objective aspects of the economy and formulates scientific theories, allowing predictions about economic behavior.

• Normative Economics: Involves subjective value judgments, providing recommendations on what economic actions should be taken.

Opportunity Cost

• Defined as the next best alternative that must be forgone when making a decision, emphasizing the cost of choices.

Factors of Production

• Includes:

  • Land: All natural resources.

  • Capital (Physical): Tools and machinery used in production.

  • Human Capital: Workforce capabilities.

  • Natural Capital: Resources like biodiversity.

  • Financial Capital: Monetary assets used for production.

  • Labour: Mental and physical efforts utilized in production.

  • Technology: Methods to combine resources effectively.

Economic Basic Questions

1. What to produce?: Determining which goods/services should be manufactured.

2. How to produce?: Deciding on production methods and resource combinations.

3. For whom to produce?: Identifying intended consumers of produced goods/services.

Types of Goods

• Free Goods: Items with zero opportunity cost.

• Economic Goods: Items that are scarce and require choice and trade-offs to obtain.

Economic Models

• Effective models are based on assumptions that predict economic behavior, facilitating theory development through empirical data comparisons.

Rational Behavior in Economics

• Assumes actors make decisions aimed at maximizing their utility based on available information and resources.

Ceteris Paribus

• A principle that asserts all factors, except those under consideration, remain constant to isolate the effects of specific variables.

Economic Systems

• Planned Economy: Government-directed decisions about production and resources, exemplified by North Korea.

• Free Market Economy: Decentralized decisions made by individuals, characterized by market-driven resource allocation, as seen in Hong Kong.

• Mixed Economy: Combines elements of both planned and free market systems, enabling varied decision-making structures.

Production Possibilities Curve (PPC)

• Illustrates the maximum output combinations of goods/services available in an economy when resources are fully utilized. Efficiency is represented along the curve, with points inside signifying inefficiency.

Circular Flow of Income

• Explores interactions among various sectors in the economy, including injections (government spending, investments, exports) and leakages (savings, taxes, imports), illustrating the flow of money and resources.