Economics

• Economics is the study of how people allocate their limited resources to societies unlimited wants
• The three basic questions any economic system must answer are:

  What to produce

  How to produce

  for whom to produce
• Microeconomics is the economic problem from an individual point of veiw
• Macroeconomics is the study of the economic problem on a societies point of veiw
• Choice means people must choose what wants they will satisfy
• Scarcity means there is not enough resources to satisfy an infinite number of wants
• Opportunity cost is the next best alternative
• The principal of marginal benefit means that as you consume more of something the additional benefits you get declines
• Marginal analysis means calculating marginal or additional benefits and comparing it with the marginal cost
• Ceteris paribus means all other things constant
• A Production Possibility Frontier shows all the combinations of goods and services that can be produced by an economy given the available resources and the level of technology
• If the opportunity cost between two goods is constant, the PPF will be straight
• The economically efficient point is the combination that maximizes net benefit for society
• An outwards shift of the whole PPF occurs if there is an increase in the quantity or quality of resources that affects the production of both goods.
• A market economy is an economy where resources are owned privately and decisions are made by the owners acting in self interest
• In a command economy, the government owns most of the factors of production and makes all economic decisions
• The law of supply states that as the price of a good or service rises, the quantity supplied will also rise.
• The law of demand states that as the price of a good rises, people buy less of it, ceteris paribus
• There is a negative relationship between price and quantity demanded, and this is for two reasons, the income effect and the substitution effect.
• The income effect is when the price of a good rises, consumers are not willing to buy as much of it, because their real income has decreased
• The substitution effect is when the price of a good rises, consumers switch from buying that good to another good which they can afford instead
• Non price factors affecting demand are: 


  Levels of disposable income

  Substitutes and compliments

  Tastes and preferences

  Expectations of consumers

  Demographic factors