Economics chapter 1,2

Introduction to Economics

What is Economics?

• Economics is the study of choices and their consequences.

• It explains how individuals, businesses, and governments decide what to produce, how to produce, and for whom to produce.

• Scarcity exists because we have unlimited wants but limited resources.

Basic Economic Concepts

• Scarcity: Resources are limited, so choices must be made.

• Choices: Decisions about how to use limited resources.

• Incentives: Rewards or penalties that influence choices.

Microeconomics vs. Macroeconomics

• Microeconomics: Focuses on individuals and businesses.

• Macroeconomics: Focuses on the economy as a whole.

The Big Economic Questions

1. What goods and services should be produced?

2. How should they be produced?

3. For whom should they be produced?

Factors of Production

• Land: Natural resources.

• Labour: Human work and skills.

• Capital: Tools, machines, and buildings.

• Entrepreneurship: Organizes land, labour, and capital to create businesses.

Income Distribution

• Land earns rent.

• Labour earns wages.

• Capital earns interest.

• Entrepreneurs earn profit.

Self-Interest vs. Social Interest

• Self-interest: Decisions made for personal benefit.

• Social interest: Decisions that benefit society.

The Economic Way of Thinking

• Trade-off: Giving up one thing to get another.

• Rational choice: Comparing costs and benefits.

• Opportunity cost: What you give up to get something.

• Incentives influence choices.

Production Possibilities Frontier (PPF)

• The PPF shows the possible combinations of goods an economy can produce.

• Efficient production occurs when the economy is on the PPF curve.

Opportunity Cost and Trade-offs

• Opportunity cost: The value of the next best alternative.

• Trade-offs happen when producing more of one good means producing less of another.

Marginal Thinking

• Marginal cost: Cost of producing one more unit.

• Marginal benefit: Benefit from consuming one more unit.

• Allocative efficiency: When marginal cost = marginal benefit.

Economic Growth

• Economic growth shifts the PPF outward.

• It happens through:

  • Technological advancements.

  • Capital accumulation (investing in machines, education, etc.).

Gains from Trade

• Comparative advantage: Producing a good at a lower opportunity cost.

• Absolute advantage: Producing more of a good than others.

Economic Coordination

• Firms: Organize production.

• Markets: Where buyers and sellers trade.

• Property rights: Define ownership and usage rights.

• Money: Facilitates transactions.