Economics

• Economics


  The study of allocating limited resources to meet unlimited wants and needs
• Economy


  Comes from the Greek word meaning 'one who manages a household'
• Households need to make many decisions, such as allocating resources (which are often scarce) amongst household members, taking into consideration each person's ability, efforts and desires
• Society also faces similar choices, but on a much larger scale
• The problem of scarcity means not having enough resources to satisfy all our needs and wants
• The three economic questions

  • What goods and services should be produced (and in what quantity)
  • How should they be produced (including who does what)
  • Who gets to consume these goods
• Scarcity is the fundamental economic problem confronting individuals and society as a whole
• If there was an abundance of everything there would be no need to choose between competing alternatives
• Resources are not allocated by an all-powerful dictator or committee but through the combined choices of all of the individuals, business and governments within that society
• Economics


  The study of how people make decisions, how much they will work, what they will buy, how they will save and so on, and how these groups interact with each other
• Economists also look at the trends that affect a society as a whole such as economic growth, unemployment and inflation
• What economics covers the study of

  • The behaviour of individuals, organisations (businesses) and institutions (governments)
  • Scarcity and choice
  • The use of resources to satisfy needs and wants
• Microeconomics


  Looks at the parts of an economy, examines the behaviour of individuals and groups within an economy
• Questions that can be analysed using Microeconomics


  • Are people and countries better off as a result of trade?
  • Why do some people earn so much more than others?
  • Why are houses so expensive these days, and what can do done about this?
  • How do taxes affect people's behaviour?
  • How good a job do markets do?
• Macroeconomics


  Looks at how an entire economy functions, the big picture of how an economy operates
• Questions that relate to Macroeconomics

  • Is inflation a good or bad thing? What causes inflation and how can it be reduced?
  • What causes recessions and what can be done about them?
  • What can be done about unemployment?
  • What causes the New Zealand dollar to go up and down?
• Need


  Something that is essential for survival
• Want


  Something that is desired but is not essential for survival
• Good


  A physical item
• Service


  A task that is performed by someone
• Factors of production/input factors

  • Land/Natural
  • Labour/Human resources
  • Capital goods
  • Entrepreneurs
• Land/Natural


  All naturally occurring resources in their natural state
• Labour/Human resources


  All human effort and skill, including entrepreneurs
• Capital Goods


  All resources used in production that have been made
• Enterprise/Entrepreneurs


  People who undertake a business opportunity with the possibility of a profit or loss
• Capital goods


  Human-made resources used to produce other goods and services
• Consumer goods


  Goods used to meet a final need or want
• Scarcity requires choices to be made about what goods and services to produce, how to produce them, and who gets to consume them
• Economic systems


  • Capitalist/free market
  • Communist/planned
  • Mixed
• Opportunity cost


  The loss of the next best opportunity we could have chosen
• Opportunity cost examples


  • Spending time cleaning car instead of playing golf
  • Studying accounting instead of economics
  • Watching TV instead of socialising or studying
• Opportunity costs are important to businesses as well as society
• There is no such thing as a free lunch - to obtain something we have to give something else up
• Marginal cost


  The cost incurred by producing one extra unit of that good
• Opportunity cost


  The next best option given up in making a choice
• Opportunity cost examples


  • Paying an employee $700 a week forgoes the opportunity of using that $700 to hire equipment
  • The cost of a heart bypass operation may be the same cost as two hip replacements, which could have been carried out with the same resources used for the heart bypass
• There is no such thing as a free lunch. To obtain something we have to give something else up
• Making decisions (choices) means we have to trade-off one objective against another
• All choices result in an opportunity cost
• Past costs have already been incurred and no action taken can alter those costs. The only costs of relevance now are the extra costs which can be attributed to the carrying out of particular actions