Basic Economic Ideas & Resource Allocation – Quick Review

Scarcity & Choice

  • Fundamental economic problem: \text{Unlimited wants} > \text{Limited resources}.
  • Scarcity forces agents (consumers, firms, governments) to choose; every choice incurs an opportunity cost.

Opportunity Cost

  • Definition: value of the next-best alternative foregone when a choice is made.
  • Can be measured in \text{money}, \text{time}, effort, satisfaction, or health.
  • Always compare marginal (additional) benefits vs marginal costs when deciding.

Basic Questions of Resource Allocation

  1. What to produce? (goods & quantities)
  2. How to produce? (technique & resource mix)
  3. For whom to produce? (distribution of output)

Economics as a Social Science

  • Uses objectivity, discovery, data analysis, and theory testing.
  • Employs models (simplified reality) to predict behaviour, often with the assumption ceteris paribus (other factors constant).
  • Branches:
    • Microeconomics – individual markets & agents.
    • Macroeconomics – economy-wide aggregates.

Positive vs Normative Statements

  • Positive: fact-based, testable ("An increase in tax lowers car sales").
  • Normative: value-laden, prescriptive ("Taxes should be higher on luxury cars").

Time Periods in Production

  • Very short run: all factors fixed.
  • Short run: at least one factor fixed (usually capital/land).
  • Long run: all factors variable.
  • Very long run: technology & institutions can change.

Factors of Production & Rewards

  1. Land – natural resources → \text{Rent}
  2. Labour – human effort/skills → \text{Wages}
  3. Capital – man-made aids to production → \text{Interest}
  4. Enterprise/Entrepreneurship – risk-taking & organisation → \text{Profit}

Human vs Physical Capital

  • Human capital: skills, education, health.
  • Physical capital: tangible tools, machinery, buildings.

Entrepreneur’s Role

  • Combines factors, innovates, leads, takes risks, adapts to market changes.

Economic Systems & Role of Government/Market

  1. Traditional: customs guide production & distribution.
  2. Market (Capitalist): decisions via supply & demand; gov’t enforces property rights & competition laws.
  3. Planned (Socialist/Command): government sets output targets, prices, resource allocation.
  4. Mixed: elements of both market and planning; gov’t provides public goods & corrects market failures.

Key Reminders for Exams

  • Always link scarcity→choice→opportunity cost.
  • Distinguish positive vs normative in questions.
  • Apply ceteris paribus when isolating one variable.
  • Match each factor with its correct reward.
  • In case studies, map decisions to the three basic questions and identify the economic system.
  • Use marginal analysis: continue an activity while MB \ge MC.