1.1 What is economics?

• Economics is a social science
• Economics is the study of choices
• There are nine central concepts:

  1. Scarcity
  2. Choice
  3. Efficiency
  4. Equity
  5. Economic well-being
  6. Sustainability
  7. Change
  8. Interdependence
  9. Intervention
• There are four factors of production:

  1. Land
  2. Labour
  3. Capital
  4. Entrepreneurship
• The main economic problem is scarcity.
• There are unlimited human needs and wants to be met by limited resources.
• Opportunity cost of a choice is the value of the next best alternative.
• A free good is a good that is not scarce and therefore available without limit eg. water, air
• The basic economic questions are:

  1. What/how much to produce?
  2. How to produce?
  3. For whom to produce?
• Economics systems:

  • Free market economy
  • Planned economy
  • Mixed economy
• In a free market economy, the prices of goods and services are determined by supply and demand expressed by producers and consumers. They operate without intervention of governments or any other external authority.
• In a planned economy, the government decides what goods and services to produce, as well as how much and for whom.
• In a mixed economy, the government and private sector work together.
• The Production Possibility Curve (PPC) is a simple model that shows the production capabilities of an economy based on its scarce resources.
• Assumptions of the PPC:

  • Only shows two goods
  • Goods are produced using combinations of the available resources
  • The state of technology at each moment in time is fixed
  • The points on the curve mean that all resources in the economy are fully used
• Efficiency means that resources are being used in the best possible way. It implies that all resources are being fully used, there's no waste, and output is maximised.
• Actual output is the total amount of goods and services produced in a country in a given period of time.
• Actual growth is when an economy produces a greater amount of goods and services in one period of time than in a previous one.
• Potential output is the total amount of goods and services that an economy can produce when all of its available resources are being used efficiently.
• Potential growth is when the production capacity of an economy increases from one period to another. It means that the maximum amount of output that an economy can produce when all of its resources are being used efficiently increases.
• Potential output can be increased by:

  • an increase in the quantity of factors of production
  • an increase in the quality of factors of production
  • an improvement in technology
• The PPC can be used to explain the concept of scarcity
• Features of the PPC:

  • Opportunity cost
  • Scarcity
  • Choice
  • Unemployment of resources
  • Efficiency
  • Actual growth
  • Growth in production possibilities
• The circular flow of income model is a simplified model of the economy that shows how income, goods, and factors of production flow around the economy.

  
• Leakages:

  • savings
  • taxes
  • imports
• Injections:

  • investment
  • government spending
  • exports
• There's interdependence between the economic decision-makers by interacting and making choices in an economy. This includes households, firms, the government, banks, the financial sector, and the foreign sector.