Economics

• Economics

  The study of how individuals, businesses, governments, and societies:

  1. Make choices about how to use limited resources to satisfy their wants
  2. Coordinate those choices
  3. Respond to incentives that influence those choices
• When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions
• Rational agents will select the choice which presents the highest benefits
• Producers act rationally by


  Selling goods/services in a way that maximises their profits
• Workers act rationally by


  Balancing welfare at work with consideration of both pay and benefits
• Governments act rationally by


  Placing the interests of the people they serve first in order to maximise their welfare
• A firm increases advertising

  Demand curve shifts right
• Demand curve shifting right

  Increases the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• Economics


  A social science that deals with the creation of wealth from scarce resources, the production and distribution of goods and services for consumption, the behaviour, interaction and well-being of the groups involved in the above activities, and the fact that there is a trade-off involved in production and in consumption
• Economy


  • The mechanism through which scarce resources are organised for the production of goods and services to satisfy the needs and wants of different groups: households, firms, and government
• Needs


  Goods and services that are essential for life
• Wants


  Goods and services that are desired to improve the quality of life but are not essential
• Man's wants are unlimited but economic resources are limited
• Scarcity


  The economic condition where all resources and goods and services, though they may be plentiful, are not sufficient for all those who desire them
• Choice


  The range of options available to the individual household, firm or government when making a decision
• Opportunity cost


  The next best alternative forgone
• Money cost


  The actual cost of the inputs used to produce a good or service
• Production possibility frontier


  A graph showing the various combinations of two goods that an economy is able to produce with fixed resources
• The production possibility frontier is downward sloping from left to right, indicating that it is only possible to produce more of one good by giving up some units of the other good
• The production possibility frontier is bowed out or concave to the origin, as resources are moved away from one good production, more and more of that good must be foregone to grow the extra of the other good
• Efficient


  When an economy is producing on its production possibility frontier, all resources available in the economy are being used to produce one of the maximum possible combinations of goods
• Economic decisions


  Choices made by individuals or households on what goods and services to spend their income on, whether to save or spend, and where to work. Choices made by firms on what goods to produce, in what quantities, and at what prices to sell those goods.
• Factors influencing economic decisions of households (consumers)

  • Personal choice
  • Size of income
  • Bandwagon effect (peer pressure)
  • Type of work
  • Level of education
  • Rate of interest
  • Climate and weather conditions
• Factors influencing economic decisions of firms (producers)

  • Costs of production
  • Profits
  • Resource base
  • Industrial relations
  • Changing demand
• Ways the government influences economic decisions

  • Laws and grants to induce firms to locate in a particular region
  • Taxes on production and consumption of goods that impose a cost on society
  • Setting up of industrial zones
  • Provision of infrastructure
  • General laws to direct firms' activities
  • Laws concerning the employment of disabled persons
• Factors of production


  Economic resources used to produce goods and services
• Four factors of production

  • Land
  • Labour
  • Capital
  • Entrepreneurship
• Land


  The naturally-occurring factor of production
• Labour


  The physical labour of man that contributes to the production process
• Capital


  Goods used to produce more goods, not wanted for their own sake
• Entrepreneurship


  The risks involved in organising the other three factors for production
• Entrepreneur


  One who is willing to take on substantial financial risks to begin or organise a business
• Types of land


  • Land on the earth's surface
  • Land above ground (e.g. atmosphere, climate)
  • Seas and rivers
  • Resources beneath the earth (e.g. minerals)
• Characteristics of land


  • Fixed in supply
  • No cost of production
  • Geographically immobile
• Labour supply


  People available for work in the economy
• Characteristics of labour


  • Human factor
  • Only the worker can sell their labour services
  • Labour services cannot be stored
  • Labour is geographically and occupationally more mobile than land
  • Labour is not homogeneous
• Division of labour


  Production process divided into separate tasks with workers specialising
• Specialisation


  Workers focusing on a specific task and becoming skilled in that area