Introduction to Economics

Go back

Macro-economics vs Micro-economics

• Macro-economics and Micro-economics are 2 of the largest subdivisions of the study of economics
• Micro- refers to the observation of small economics units
  • Effects of government regulations on individual markets and consumer decision making
• Macro- refers to the “big picture” version of economics
  • How interest rates are determined
  • Why some economics grow faster than others

Micro-economics

• Individual markets
• Consumers
• Producers/firrms
• Government
• How their actions influence decisions and individual markets
• Utility maximisation/satisfaction
• Firm production and profit maximisation
• Individual market equilibrium
• Effects of government regulations on individual markets
• Externalities and other side effects

Macro-economics

• The big picture
• Focuses on aggregate production and consumption in an economy
  • Effects of general taxes such as income and sales taxes on output and prices
  • Causes of economics upswings and downturns
  • Effects of monetary and fiscal policies on economics health
  • Effects of, and process for, determining interest rates
  • Causes for some economies growing faster than other economies
  • Uses GDP (Gross Domestic Product: monetary value of all finished goods and services within a give time period) and goods and services by their market price
  • Inflation, unemployment rate, GDP

Scarcity

• We have unlimited wants and limited resources to satisfy those wwants
• There is a scarcity of resources
• Resources have alternative uses

Basic Economic Problem (BEP)

• BEP is every and affects us all
• Due to the problem of “relative scarcity”
  • Scarcity relative to our wants
• Resources may be abundant but wants are unlimited, how are the resources allocated: relative scarcity
• Due to scarcity, we are forced to make choices
• Resources cannot be used for all human wants
• We must choose
• We have unlimited wants, but there is a scarcity of resources to satisfy those wants. Therefore, a choice must be made.

Opportunity Cost

• When a choice is made, it involves a sacrifice known as an opportunity cost
• Real cost of the next best alternative forgone based on a choice or decision
• Usually measured in terms of goods/services or monetary value given up (relative to the alternative course of action)

Possibility Production Frontier (PPF)

• Model that demonstrates how opportunity costs arise when individuals or the community makes choices
• Shows the various combinations of 2 alternative products that can be produced
  • Assuming that:
    • Technology is constant/fixed
    • There is a fixed quantity of resources
    • All resources are used to their fullest capacity
    • Economy can only produce 2 goods/services
• Points inside the curve are inefficient: resources are not being used to their fullest extent
• Points on the curve are attainable, and resources have been used to their fullest extent
• Points outside the curve are desirable but unattainable, as we have a scarcity of resources, and our technology is fixed, so we cannot achieve those points

Free Goods and Economic Goods

Free Goods

• Free good is any good that is not scarce
• Therefore has no opportunity cost
• Not limited by scarcity
• Therefore, it includes anything that can be obtained without sacrificing something else
• E.g., sunlight

Economics Goods

• Any good that is scarce, either because it is a naturally occuring scarce resource:
  • Oil
  • Gold
  • Coal
  • Forests/wood
  • Lakes/water
• OR because it is produced by scarce resources
• All economic goods have an opportunity cost lower than 0
• 2 types of goods that are available free of charge but which do have opportunity costs and are therefore economic goods
  • Goods provided by the government (paid by tax-payer’s money)
  • Certain natural resources that are not owned by anyone are called common pool resources
    • Also considered economic goods because they are scarce, and are becoming increasingly scarce due to overuse and depletion
    • E.g., clean air, wildlife, lakes, forests, rivers

A good can be a free good in certain situations and an economic good in others

• E.g., oxygen out in the countryside is a free good, but in a crowded room, it becomes an economic good

Important to distinguish free goods from goods that are available free of charge to their users

Basic Economic Questions

• All economies/countries face scarce resources and unlimited wants
• Decisions have to be made regarding the use of resources
• So an economy has to have a system to answer the 4 basic economic questions
  • What to produce?
  • How to produce?
  • How much to produce?
  • For whom to produce?
• Given unlimited wants, but scarce resources, so a choice must be made

Positive and Normative Concepts

• Economists think about the economic world in 2 ways
• 1 way tries to explain how things in the economy actually work
  • Positive Concepts
  • Based on facts/models
• The other deals with how things ought to work
  • Normative Concepts
  • Based on opinions

Positive Concepts

• Positive statements can be true or false
• Based on facts and models
• Describes how things actually work in the economy

Normative Concepts

• Normative statements can only be assessed relative to values, opinions, and judgements
• Cannot be true or false
• Describes how things should/ought to work in the economy

4 Factors of Production (FOP)

• Land: Natural resources
• Labour****: Physical or mental effort used to produce goods/services
• Capital: Artificial FOP used to produce goods and services. Goods that make other goods/services
  • Physical capital: investment goods
  • Investment: spending on capital goods
• Enterprise: Skill used to organise all other FOP