1.1) Nature of Economics

• Economics


  A social science that studies societies and the human interactions within those societies
• Economists


  • Build models
  • Models make various assumptions (behaviour, choices, likely outcomes)
  • Necessary to account for complex human behaviour and constantly changing variables
• Ceteris paribus


  All other variables remain constant
• Social scientific method


  1. Define a question to investigate

  2. Develop a hypothesis using ceteris paribus

  3. Conduct empirical research (collected through observations, surveys, opinion polls etc.)

  4. Gather data

  5. Analyse data

  6. Report the conclusion
• Positive statement


  Can be fact-checked
• Normative statement


  Opinions and beliefs
• Value judgements


  • Influence an individual's choices in the economic decisions they make
  • Influence government's choices regarding the economic policies they adopt and spend money on
• The basic economic problem

  Resources are scarce
• Economics is the study of scarcity and its implications for resource allocation in society
• Scarcity


  Has a direct influence on prices in a free market
• Types of resources


  • Renewable resources
  • Non-renewable resources
• Opportunity cost


  Cost of the next best thing forgone
• Production possibility frontiers (PPF)


  • Economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
• Capital goods


  Assets that help a firm or nation to produce output (manufacturing)
• Consumer goods


  End products that have no future productive uses
• Points on the PPF


  • Point A (300 consumer goods, 0 capital goods)
  • Point B (0 consumer goods, 200 capital goods)
  • Point C (120 consumer goods, 150 capital goods)
  • Point D (225 consumer goods, 100 capital goods)
  • Point E (inefficient)
  • Point F (unattainable)
• Producing at any point on the PPF curve

  Represents productive efficiency
• Economic growth


  Occurs when there is an increase in the productive potential of an economy, demonstrated by an outward shift of the entire PPF curve
• Economic decline


  Occurs when there is any impact on an economy that reduces the quantity or quality of the available factors of production
• Specialisation


  Breaking up tasks allows for the employee to specialise resulting in higher output per worker, increasing productivity
• Levels of specialisation


  • Individual level
  • Business level
  • Regional level
  • Global level
• Functions of money


  • Medium of exchange
  • Measure of value
  • Store of value
  • Method of deferred payment
• Fundamental economic questions


  • What to produce?
  • Who to produce it for?
  • How to produce it?
• Free market economy


  Has no government intervention in the allocation of resources or distribution of goods and services
• Command market economy


  All resources are owned by the state and the government controls the distribution of goods and services
• Mixed market economy


  A blend of the free market and command market as individuals, firms and the government own factors of production
• Free market (Adam Smith)

  • Adam Smith advocated for free markets with low levels of government intervention
  • He recognised that there was a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods
  • He believed economies function best when private individuals work in their self-interest
• Mixed market (Friedrich Hayek)

  • Friedrich Hayek believed that command economies were flawed
  • He identified information gaps between what the economies required and what the central planners in command economies were saying it required
  • These gaps led to shortages or surpluses of goods/services in command economies
  • He felt that the threat to efficiency and economic growth is overly heavy government intervention
• Command market (Karl Marx)


  • Karl Marx believed that free markets lead to capitalism, in which the owners of the factors of production (Capitalists) exploited the workers
  • This creates inequality, which will lead to a breakdown between the classes
  • The role of the State is therefore to share the means of production and ownership with all of the workers in society
  • This required the abolition of private property
  • This required the State to become the central planner, deciding how each of the three economic questions would be answered
• Role of the state in a mixed economy

  Government intervention mainly occurs through taxation (to raise revenue) and then spending that revenue to redistribute income and provide essential goods and services