--- title: Introduction to Economics enableToc: false --- [Go back](Economics/Economics.md) ### 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 ## 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**