H2 Economics

• Having limited resources available to satisfy unlimited wants is the fundamental problem that necessitates choice and decision-making by all economic agents
• Unit Summary

  • Resources needed to produce goods and services to satisfy wants are limited
  • Resources are collectively known as factors of production
  • Economic agents such as consumers, producers, and governments need to make choices
  • Scarcity requires decisions to be made
  • Choice of one option over others incurs opportunity cost
  • Opportunity cost is the next best alternative forgone when a choice is made
  • Economic agents make choices using the marginalist principle
  • Study of Economics is important to understand how economic agents make decisions in the face of scarcity to maximize welfare
• Essential Questions

  • Why do we need to make decisions/choices?
  • How do we make decisions?
• Scarcity is the fundamental problem all economies face
• Table of Contents

  • Introduction to Economics
  • The Central Problem of Economics
  • The Production Possibility Curve (PPC)
  • The Decision-Making Framework
  • Resource Allocation in an Economy
  • Glossary List
  • Appendix
  • Past Year Examination Papers
• Scarcity refers to the situation where limited resources are insufficient to fulfil unlimited wants
• Economic agents such as consumers, producers, and the government need to make choices to fulfil their objectives and incur opportunity costs
• Topics in Overview of Microeconomics


  • Scarcity as the central economic problem
  • Markets
  • Firms and Decisions*
  • Microeconomic Objectives & Policies
• Microeconomic Objectives

  • Efficiency and Equity
• In the pursuit of their objectives, economic agents gather information, weigh benefits and costs, consider constraints and perspectives before making decisions. They take into account the intended and unintended consequences, and any changes occurring, before reviewing the decisions
• Decision-Making Process of Economic Agents
• Impact of firms’ decisions & strategies

  • Efficiency
  • Consumer welfare
  • Other firms
• Scarcity as the Central Economic Problem
• Efficient resource allocation may not result in equitable outcomes
• Market Failure and its Causes

  • Public goods
  • Externalities
  • Information Failure (including asymmetric information)
  • Immobility of Factors of Production
  • Market Dominance
• Macroeconomics


  • Study of the economy as a whole
  • Focuses on aggregate characteristics and economy-wide factors at the national level
• A marginalist approach to weighing costs and benefits is expected
• Concepts & Tools of Analysis

  • Scarcity, choice and opportunity cost
  • Production possibility curve (PPC)
  • Marginalist principle to weigh costs & benefits
• Microeconomics


  • Study of economic behaviour of individuals and firms
  • Concerned with the interrelationships between households, firms, and government
• Objectives of rational economic agents

  • Consumers aim to maximise utility (satisfaction)
  • Producers aim to maximise profits
  • Governments aim to maximise social welfare
• Microeconomics vs. Macroeconomics
• At the end of this topic, students are expected to master the understanding of the following:
• Definition of Economics
• Positive Economics vs. Normative Economics
• Table 1: Differences between Microeconomics and Macroeconomics
• Normative Economics


  • Normative statements involve making value judgments
  • Cannot be verified as they are opinions based on value judgments
• Positive statements


  • An increase in household incomes will lead to an increase in the demand for luxury foods
• Positive Economics


  The branch of economics that describes and explains economic phenomena, focusing on facts and cause-and-effect relationships among economic variables
• Positive Economics


  • Includes the development and testing of economic theories
  • Sometimes referred to as "value-free economics"
• Economics is often used to make predictions or to inform policy makers of the factors to be considered before making a decision
• Entrepreneurship


  The factor of production that takes overall responsibility for the decision-making process in the firm
• Economic resources or Factors of Production

  • Capital
  • Entrepreneurship
  • Land
  • Labour
• Capital


  All man-made material/physical resources used or available for use in production
• Positive statements are value-free judgments
• Normative Economics


  The branch of economics that expresses value judgments about economic fairness or what the outcome of the economy and policy measures ought to be
• Positive statements can be verified by empirical evidence
• Land

  All the natural resources available
• Labour


  Refers to people, including their skills and abilities
• Due to the problem of scarcity, there is a need to make choices among alternative options
• Scarcity is the problem where limited resources are unable to satisfy unlimited human wants