EC0 TERM ONE BASIC NOTES

IBS-ECONOMICS (IBCP1) - Foundation of Economics

1. Introduction to Economics

• Economics as a social science

  • Concerns human behavior and societal organization.

  • Focuses on activities that satisfy needs and wants.

2. Levels of Economics

• Microeconomics

  • Examines behavior of individual decision-making units.

    • Two main groups: Consumers (households) and Firms (business).

  • Analyzes choices and consequences in markets, determining prices.

• Macroeconomics

  • Looks at the economy as a whole, using aggregate data.

3. Key Concepts Acronym: W.I.S.E.C.H.O.I.C.E.S

• Economic Well-being

  • Dimensions: prosperity, financial satisfaction, quality of life factors (health, education, social connections).

• Interdependence

  • Economic decision-makers rely on each other across levels (individuals, communities, nations).

• Scarcity

  • Limited resources vs. unlimited wants; studies allocation to satisfy needs.

• Efficiency

  • Optimal use of scarce resources; focuses on minimizing waste and maximizing output.

• Change

  • Represents shifts in economic conditions, influencing supply and demand.

• Equity

  • Refers to fair distribution of income and opportunities.

• Sustainability

  • Ensures current actions do not hinder future generations' resource availability.

4. Core Economic Principles

4.1 Scarcity and Choice

• Scarcity leads to making choices about production and consumption (e.g., guns vs. butter).

• Economics is defined as the study of choices in the face of scarcity.

4.2 Sustainability

• Sustainable development: growth that meets present needs without compromising future generations.

4.3 Factors of Production

• Land: Natural resources (e.g., minerals, forests).

• Labor: Human physical and mental effort.

• Capital: Man-made resources (e.g., machinery, tools) and financial instruments.

• Entrepreneurship: Innovation and risk-taking to organize resources.

4.4 Opportunity Cost

• Opportunity cost: The value of the next best alternative sacrificed when making a choice.

• Example: Choosing shoes over a book incurs the opportunity cost of the book.

5. Economic Questions

• What/how much to produce?

• How to produce?

• For whom to produce?

6. Market Mechanisms

• Market vs. Command Economies

  • Market systems focus on private ownership; command economies are government-directed..

7. Production Possibilities Curve (PPC)

7.1 Understanding PPC

• Illustrates maximum combinations of two goods produced using resources efficiently.

• Points on and inside the curve represent efficient and inefficient production respectively.

8. Circular Flow Model

• Depicts the economy's interactions; focuses on households and firms without government or international trade.

• Leakages and Injections

  • Leakages (savings, taxes, imports) withdraw income, whereas injections (investment, government spending, exports) add income.

9. Government Intervention

9.1 Reasons for Intervention

• Earn revenue, support firms, influence production/consumption, correct market failures, and promote equity.

9.2 Price Controls

• Price Ceilings: Max prices designed to aid affordability but lead to shortages.

• Price Floors: Min prices to support income (e.g., minimum wage), leading to surpluses.

9.3 Taxes and Subsidies

• Indirect Taxes: Impact spending; can discourage demerit goods consumption.

• Subsidies: Governments provide financial aid to firms/individuals to encourage production of merit goods.

10. Elasticity Concepts

10.1 Price Elasticity of Demand (PED)

• Responsiveness of demand to price changes.

10.2 Income Elasticity of Demand (YED)

• Responsiveness of demand to income changes.

10.3 Price Elasticity of Supply

• Measures how responsive supply is to price changes.

Conclusion

• Understanding the foundations of economics provides insight into decision-making at both micro and macro levels, emphasizing the importance of resource allocation, market mechanisms, and the role of government in economic activities.