Chapter 1 - Basics of Economics

Definition: "Rational economic man acts so as to maximize his utility/self-interest".

Economics is defined as the study of scarcity and choice:
- It deals with reconciling unlimited wants with limited resources.
- It studies how humans make choices under conditions of scarcity.
Quote from Robbins (1935, p. 16): "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses".

Microeconomics:
- Focuses on the individual consumer, firm, or market.
- Involves variables like the price of a specific product, revenue or income of a firm or household, expenditures of a specific firm or family.
Macroeconomics:
- Studies the entire economy or major aggregates of the economy.
- Topics include economic growth, business cycle, interest rates, inflation, and the behavior of major economic aggregates (government, household, and business sectors).

Positive Economics:
- Economic statements that are factual.
- Involves the analysis of facts to establish cause-and-effect relationships (What is).
Normative Economics:
- Economic statements that involve value judgments.
- Concerned with value judgments about what the economy ought to be like (What ought to be).

Land:
- Includes all natural resources ("gifts of nature") used in the production process.
- Examples: forests, mineral deposits, water resources, wind power, sunlight, and arable land.
Labour:
- Refers to the physical actions and mental activities contributed by people in the production of goods and services.
- Associated with human capital.
Capital:
- Comprises all manufactured aids used in producing consumer goods and services.
- Examples: factory, storage, transportation, distribution facilities, tools, and machinery.
- Acquisition of capital goods equals investment.
Entrepreneurial Ability:
- A distinct human resource differing from labour.
- Functions include taking initiative, making strategic business decisions, innovating, and taking risks.

An economic model illustrating different combinations of two goods that an economy can produce.
Assumptions:
- Full employment
- Fixed resources
- Fixed technology
- Two goods: consumer goods and capital goods.
Production Possibilities Table:
- Lists combinations of two products potentially produced with a specific set of resources, assuming full employment.
- Example Table: Production Possibilities of Pizzas and Robots.
- A: 10 Pizzas, 0 Robots
- B: 9 Pizzas, 1 Robot
- C: 7 Pizzas, 2 Robots
- D: 4 Pizzas, 3 Robots
- E: 0 Pizzas, 4 Robots.

Production Possibilities Curve (PPC):
- Illustrates combinations of the goods graphically.
- Concave shape due to the law of increasing opportunity costs, indicating marginal opportunity cost rises as more of one good is produced.
Points outside the curve represent unattainable production levels due to limited resources and fixed conditions.
Points inside the curve indicate attainable production levels but signify unemployment or inefficiency in resource use.

Economic growth is depicted by an outward shift of the production possibilities curve, showing an increase in the potential output of an economy.
Example Growth Table:
- A': 14 Pizzas, 0 Robots
- B': 12 Pizzas, 2 Robots
- C': 9 Pizzas, 4 Robots
- D': 5 Pizzas, 6 Robots.

Recognizing scarcity necessitates making choices, as not all desired goods can be produced simultaneously with available resources.
Understanding how different factors of production contribute to overall economic efficiency informs policy-making and economic strategy.