Applied Economics

• Economics is derived from Greek words 'oikos' (household) and 'nonos' (management), with ancient family organization being key
• Adam Smith, a Scottish economist, is known as the father of classical economics, focusing on wealth production and distribution in a market economy
• Smith's book, "Inquiry into the Nature and Causes of the Wealth of Nations," explores why some countries are rich while others are poor
• Alfred Marshall defines economics as a study of human life and interaction, emphasizing human involvement and interaction
• Lionel Robbins' definition of economic science focuses on human behavior as a relationship between ends and scarce means with alternative uses
• Abraham Maslow's basic needs include food, housing, water, air, and clothing
• Economic goals include efficiency, full employment, equity, equality, stability, and economic growth
• Efficiency refers to producing desired results with minimal cost or waste, achieving maximum satisfaction from limited resources
• Full employment is achieved when all available labor resources are fully utilized
• Equity is achieved when income and wealth are fairly distributed within society
• Economic stability is a strong macroeconomic foundation where employment, production, and prices are firm and constant
• Economic growth refers to an increase in overall output or production, allowing for more goods and services to be produced
• Applied economics analyzes and explains economic situations, emphasizing seeking best solutions to economic circumstances
• Economic models represent economic theories through tables, graphs, mathematical equations, and diagrams to better understand economic events
• Positive economics explains economic phenomena based on factual information and evidence
• Normative economics explains economic phenomena based on value judgments
• Microeconomics studies individual and firm behavior in resource allocation decisions
• Macroeconomics studies the entire economy's performance, behavior, and decision-making
• John Maynard Keynes is known as the father of modern economics, advocating for government-sponsored full employment policy
• Economic resources include land, labor, capital, and entrepreneurial skills, essential for daily living and production of goods and services
• Land refers to natural resources, labor to human capital, and capital to man-made materials used in production and investments
• Capital includes fixed and working capital, financial resources, and machinery
• Entrepreneurial skills are essential for innovation and driving economic growth
• Economic resources are the factors of production used to produce goods and services
• Landowners receive rent, laborers receive wages, and capital is used in production and investments
• Microeconomic activities occur at the individual market level, like the price of a good or hiring employees, while macroeconomic activities happen at the whole economy level, such as inflation or unemployment statistics

  
• The Production Possibilities Frontier (PPF) shows the combinations of goods and services that can be produced and those that cannot, given available resources

  
• The PPF illustrates the concept of opportunity cost, which is the value of the next-best alternative given up when a choice is made
• The PPF curve slopes downward from left to right, indicating that as an economy produces more of one good, it must give up some of the other good
• Points on the PPF are attainable, meaning the economy can produce any combination of goods on it, while points outside the PPF are unattainable
• The PPF is a tool for understanding economic choices and trade-offs in society, like between economic growth and environmental protection
• Factors of production:

  • Land: natural resources like water, minerals, and forests
  • Labor: human effort and skills, with workers receiving income called wage
  • Capital: man-made materials used in production and investments in capital goods for future use, including fixed and working capital, financial resources, and interest payments
  • Entrepreneurial Ability: skills to produce goods and services, manage resources, make business decisions, and handle risks
• Basic Economic Questions:

  1. What to produce?

  2. How to produce?

  3. For whom are goods and services to be produced?
• Economic Systems:

  • Traditional Economy: basic system with activities like agriculture and bartering
  • Command Economy: centralized government control
  • Market Economy: firms and households allocate resources
  • Mixed Economy: blend of market and command economies with government intervention
• Trade-off in economics involves a compromise where one or more aspects are sacrificed for a specific product, service, or experience, resulting in a loss of another aspect
• Opportunity Costs in Economics:

  • Created by trade-offs
  • Refers to potential benefits lost in decision-making
  • Represents alternatives given up
• Unemployment:

  • Major causes include frictional, structural, cyclical, and seasonal unemployment
• Poverty:

  • Major causes include corruption, lack of education, natural and geographical characteristics, and ineffective governance and government policies