1.1 Nature of Economics

• What are Economic models 


  A simplified version of reality. Models are built on assumptions.
• What are assumptions


  Initial or prior conditions made before an analysis is built
• Ceteris parabus


  All other influencing factors are kept constant
• Other assumptions

  1. People are rational
  2. Businesses and consumers aim to maximize utility
  3. Information to make decisions is readily available and accurate
• What are positive statements 


  Objective statements, which can be tested and proven
• Normative statements 


  Subjective statements, built around opinions and beliefs
• The basic economic problem


  The problem of scarcity

  People have unlimited wants, but there are finite resources
• Decisions that must be made for production

  What goods and services to produce?

  How best to produce the goods and services

  Who to sell the goods and services to
• Factors of production

  • Land
  • Labour
  • Capital
  • Enterprise
• Land


  any natural resources and literal area
• Labor


  Quantity and quality of people working
• Capital 


  Man-made goods produced to make products
• Enterprise

  Entrepreneurs
• Opportunity cost

  Cost of the loss of the next best alternative
• What is a PPF

  Graphical representation that shows the maximum output of 2 goods and services produced, assuming full utilisation of resources
• What does each letter mean

  .

  A) A, B,C

  B) D, E

  C) F

  
• Reasons for Economic growth

  • New and improved technology
  • Improved education and training
  • New resources
  • Efficient labour
• Reasons for economic shrink

  • Natural disasters
  • War
  • High unemployment
  • Fall in productivity of labour
• Specialization

  When we concentrate on producing a specific product or task
• Division of labor

  Breaking down production into small tasks for each worker to specialise in
• Division of labor advantages

  • More efficient work
  • Better skilled workers
  • Better quality product
• Disadvantages of division of labor

  • Boring and repetitive
  • Quality suffers
  • Chance of structural unemployment
• Functions of money

  • Medium of exchange
  • Store of value
  • Unit of account
• The free market economy

  Producers should be free to enter, innovate, and sell in the market. There is no government intervention
• Free market advantages

  Price competitiveness

  More innovation

  Better standards of living
• Free market disadvantages

  Increased income inequality

  Workers exploited

  Monopolies
• Command Market

  All resources owned by the state, government controls distribution of goods and services
• Command market advantages

  Decrease in inequality

  Decrease unemployment
• Command market disadvantages

  Less incentive to work due to low pay

  Lack of competition so less innovation

  Personal freedom restricted