ECW1101 Week One Economics Summary

Fundamental Economic Problem

Society’s wants and needs exceed the limited resources available, so every choice requires a sacrifice. Economics studies how people and societies manage these scarce resources.

Basic Allocation Questions

Any economy must decide what goods and services to produce, how they will be produced, and for whom production is intended.

Principles Guiding Individual Decisions

Principle One states that choices involve trade-offs; pursuing one goal means giving up another. Principle Two defines opportunity cost as the next best alternative foregone, including both explicit money outlays and implicit sacrifices such as forgone earnings. Principle Three notes that rational people compare marginal benefits and marginal costs, acting when the former at least equals the latter. Principle Four emphasises that behaviour changes with incentives; policy measures that alter costs or benefits can therefore generate unintended effects.

Principles Governing Interaction

Principle Five holds that voluntary trade makes all parties better off, allowing specialisation and a wider variety of goods. Principle Six recognises that market prices, emerging from many decentralised decisions, usually allocate resources efficiently; interference distorts this process. Principle Seven explains that government can improve outcomes when markets fail (through externalities or market power) or when society values greater equality.

Principles Describing the Economy as a Whole

Principle Eight links living standards to productivity: output per unit of labour determines consumption possibilities. Principle Nine connects excessive money creation to inflation because a larger money supply lowers the value of each unit of currency. Principle Ten highlights a short-run trade-off between inflation and unemployment: monetary expansion can boost spending and employment temporarily, at the cost of higher prices.

Microeconomics versus Macroeconomics

Microeconomics studies the decisions of households and firms in specific markets, whereas macroeconomics analyses aggregate phenomena such as inflation, unemployment, exchange rates, and growth.

Positive versus Normative Analysis

Positive statements describe the world objectively and can be tested; normative statements express value judgments about how the world should be and cannot be proven true or false.

Economic Modelling

Economists use simplified models to understand reality. The circular-flow diagram illustrates how money, goods, services, and resources move between households and firms through product and factor markets. The production possibilities frontier shows all efficient combinations of two outputs given current resources and technology; points on the curve are efficient, points inside are inefficient, and points outside are unattainable without growth in resources or technology.