Introduction to Economics

• Economy is the study of scarcity, addressing the what, how, and for whom the production should take place.
• Law of diminishing marginal benefit describes the phenomenon in which the benefit gained from receiving one additional unit of a good decreases as the number of units consumed increases.
• Opportunity cost is the opportunity lost.
• A production possibilities frontier or a production possibilities curve is a model that shows allocation of scarce resources and its opportunity costs.

  
• Four factors of production:

  • Labour (human capital): human resources used during the production process (e.g. physical labour, intellectual input)
  • Land (natural capital): natural resources used during the production process (e.g. oil, water)
  • Capital (physical capital): technology/products used during the production process (e.g. machinery, tools)
  • Enterprise (entrepreneurship): the skills, creativity, and risk-taking ability needed to manage the other three factors
• Products can be divided into two primary types:

  • Goods: tangible products such as food and clothing
  • Services: intangible products such as a haircut or internet service
• Income is the sum of the returns for each factor of production:

  • Land $\implies$ Rent
  • Labour $\implies$ Wages & Salaries
  • Capital $\implies$ Interest
  • Enterprise $\implies$ Profit
• Economic theory states that while human wants and needs are infinite, resources are finite which leads to the problem of scarcity.
• Examples on how to expand a production possibilities curve:

  • Education
  • Innovation
  • Population growth
  • Skilled immigrants
  • Free & fair international trade
• Examples on how to shrink a production possibilities curve:

  • Natural disasters
  • War
• A resource is scarce if it is desirable yet finite.
• Because of scarcity, choices have to be made on how resources should be allocated.
• Efficiency describes how the factors of production are allocated so that benefit is maximized.
• Opportunity cost is the next best alternative foregone due to choice.
• Goods


  Tangible products such as food or clothing.
• Services


  Intangible products such as a haircut or internet service.
• Labour(Factor of production)


  Human resources used during production such as physical labour or intellectual output.
• Land (Factor of production)


  Natural resources used during production such as oil or wood.
• Capital(Factor of production)


  Technology/tools used during production such as a tractor for farming or a computer for accounting, etc.
• Enterprise (Factor of production)



  The skills, creativity, and risk-taking ability needed to manage other factors of production.
• Ceteris paribus


  All else is equal
• Private sector is where private firms and individuals produce goods and services.
• Public sector is where the government produces or supplies certain goods and services.
• Households refer to individuals who offer labour to firms for an income. Their economic goal is to maximize income and utility.
• Utility


  The satisfaction or benefit a consumer gains from the consumption of goods and services
• Firms refer to businesses who turn factors of production into goods or services. Their economic goal is to minimize the costs of factors of production and maximize revenue.
• Government exists to maintain social welfare for the general public, irrespective of political beliefs. Their economic goal is to tax both households and firms to fund government operations.
• Market is where buyers and sellers meet to engage in, ideally, mutually beneficial trade.