Economics Notes Units 1-10 PDF

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Economics Notes:The definition of economics and the features of the economic perspective:The Economic Perspective:We have limitations as individuals, and we constantly are managing theselimitations through planning and making choices.1. Thus we have scarcity and choice Limited goods and services Lim...

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Economics Notes:

The definition of economics and the features of the economic perspective: The Economic Perspective: We have limitations as individuals, and we constantly are managing these limitations through planning and making choices. 1. Thus we have scarcity and choice -

Limited goods and services

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Limited time

2. In terms of economics:

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It is the study of how individuals, business and institutions make social choices to optimize their level of satisfaction under n=conditions of scarcity

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Economics is the study of how individuals, businesses and institutions make social choices, to optimize their level of satisfaction under conditions of scarcity

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3. Opportunity cost ← second most important principle in economics -

In microeconomic theory, opportunity cost is the loss or the benefit that could have been enjoyed if the best alternative choice was chosen. As a representation of the relationship between scarcity and choice, the objective of opportunity cost is to ensure efficient use of scarce resources.

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The cost of an activity is the value of the next best alternative that must be forgone in order to undertake this activity.

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4. Rational (purposeful) behaviour -

Rational self interest an assumption in economics

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Decisions not free from mistakes or unaffected by emotions or feelings

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Desire to maximise level of satisfactions (utility)

Thus Consumers try to maximise greatest possible utility with unlimited wants/needs and certain budget constraints

Consumer rationality Economists argue that a utility maximizing individual is noted as a 'rational consumer' in the market. Someone is considered a 'rational consumer' because they are focused on their own self-interest; they maximize their utility in order to gain the most for themselves. In terms of economics, a rational producer is the one who aims at maximisation of profit. Technically, a rational producer operates in the stage of 'diminishing

returns to a factor' where the fixed factor is fully utilised and the efficiency of the factors is the maximum. Producers try to maximise profit with cost constraints and certain production techniques

Scarcity refers to the finite nature and availability of resources while choice refers to people's decisions about sharing and using those resources. The problem of scarcity and choice lies at the very heart of economics, which is the study of how individuals and society choose to allocate scarce resources

5. Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. ... The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service. The pleasure of consuming a good or service Concepts of Utility -

Cardinal (measurable) vs ordinal (comparative)

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Choose between options to maximise utility

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Allocation of time, energy and money

6. Marginal Analysis -

Marginal = extra/additional/ a change in

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Marginal costs and benefits

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Decision to obtain the marginal benefit associated with some specific option always includes the marginal cost of forgoing something else, ie forgoing something else opportunity costs present

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Marginal benefits are the maximum amount a consumer will pay for an additional good or service. The marginal benefit generally decreases as consumption increases since each buyer of a product derives less satisfaction from each successive unit of the product consumed. The

marginal cost of production is the change in cost that comes from making more of something -

Marginal utility describes the benefit that one economic actor receives from consuming one additional unit of a good, while marginal benefit describes (in dollars) what the consumer is willing to pay to acquire one more unit of the good.

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Example of Marginal Benefit -

For example, a consumer is willing to pay $5 for an ice cream, so the marginal benefit of consuming the ice cream is $5. However, the consumer may be substantially less willing to purchase additional ice cream at that price – only a $2 expenditure will tempt the person to buy another one

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit; that is, it is the cost of producing one more unit of a good

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Marginal opportunity cost(s) are the added expenses that a company will pay for increasing production. It includes actual expenses and intangible costs, as well as the income lost from other opportunities that cannot be taken if the resources are used to create more of the one product.

- Marginal vs opportunity cost Opportunity cost expresses the relationship between scarcity and choice, while marginal cost represents the cost of producing an additional unit. → Marginal relates to the next unit while Total is the sum across all the units. → Marginal costs are visible while total opportunity costs are not.

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7. Scientific Methods Economic Principles and models

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Tools for ascertaining cause and effect - Generalizations - Tendencies of typical or average consumers, workers or business firms - Other-things-equal assumptions (ceteris paribus) - Strong assumption for a particular analysis (price-quantity demanded example) - Graphical expression

Positive economics Description Description Positive economics is the branch of economics that concerns the description, quantification and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and notes that economic theories must be consistent with existing observation

Normative economics Description Description Normative economics is a part of economics whose objective is fairness or what the outcome of the economy or goals of public policy ought to be. Economists commonly prefer to distinguish normative economics from positive economics.

Macroeconomics: Examines the economy as a hole, or its basic subdivisions or aggregates, such as the government, household and business sectors. An aggregate is a collection of specific economic units treated as if they were one unit. This helps to obtain an overview. Such economic measures are spoken of as total output, total employment, total income Will influence total society

Microeconomics - concerned with individuals, person household firm or industry. Economist observes details of an economi unit. Concerned with individual, business of sector/industry

The foundation of economics is the economizing problem: society's material wants are unlimited while resources are limited or scarce. Unlimited wants (the first fundamental fact): Economic wants are desires of people to use goods and services that provide utility, which means satisfaction.

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country's economic health. What Is Per Capita GDP? Per capita gross domestic product (GDP) is a metric that breaks down a country's economic output per person and is calculated by dividing the GDP of a country by its population.

Individuals Economizing Problem -

A budget line (or constraint) -

It is a schedule or curve that shows various combinations of two products a producer can purchase with a specific money income

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Calculated with total budget

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Linked to the price of the commodity and income of the consumer

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Change in income will shift the budget line to the left or right

Society’s economising problem: -

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Based on Resource Categories: -

Land

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Capital

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Labour

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And the organisation function of the above - Entrepreneurship

We have a limitation in the number of resources thus must be optimised -

Production Possibilities Model - relates to the scarcity of resources -

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We assume the following: -

Full employment

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Fixed resources

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Fixed technology

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Two goods: -

Consumer goods

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Capital goods

Production possibility curve can more to the right will increase in economic growth, this can happen if you make processes more efficient, and increase size of the economy.

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Law of increasing opportunity cost - the line is curved, thus meaning that opportunity cost increases. . Ie, as the production of a particular good increases, the opportunity

cost of producing an additional unit will rise. As opposed to the budget line that is straight and thus constant

Production possibilities will shift to the left with a lack of resources. This you must alwaysoptimally allocate resources

Society’s Economising Problem: Society must also make choices under conditions of scarcity. Where must it devote its limited resources to. Economic Resources - The land, labour capital and entrepreneurial aBILITY THAT ARE USED IN THE PRODUCTION OF GOODS AND SERVICES; PRODUCTIVE AGENTS; FACTORS OF PRODUCTION

Chapter 2: Study material: See prescribed textbook, Chapter 1 Download Workbook Chapter 1 in ClickUP as guide Pre-Lecture Activities: Learnsmart Chapter 1 – See ClickUP Key terms and concepts: See p19 Chapter 1 Self study activities: Smart Book and Connect Questions Assessment opportunities: See ClickUP for online testing.

Chapter 2: The Market System and Circular Flow Overview: In this chapter, we start by examining different role players in the economic system. Next, the chapter focuses on the three important flows of the economy: production, income and spending, followed by a discussion on the interdependence between households and firms. We use diagrams as a circular flow to illustrate all the flows of goods, income and spending in the economy.

We further distinguish between different economic systems operating to solve the economic problem. The characteristics, which separate these systems, are discussed. The five fundamental questions in an economy are discussed with final thoughts on the “Invisible Hand” and why command systems fail. Specific outcomes: Once you have completed the activities of this learning unit you should be able to explain/discuss: • Role players in the system and the circular flow; • The mechanics of the circular flow model; • The difference between a command system and a market system; • The main characteristics of the market system; • How the market system decides what to produce, how to produce it and who obtains it; and • How the market system adjusts to change and promotes progress.

• Role players in the (economic) system and the circular flow; 1. Households -

Primary function: Supply primary production factors - labour; land; capital; entrepreneurship to private businesses and government

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Intermediate function: Production of goods and services for own use

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Final function: Use income generated from supply of production factors to purchase goods

2. Business Enterprises/Firms -

General function to supply goods and services. Determine what to supply and use production factors to effectively produce these goods and services

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In order to satisfy needs in a market-related economy, everybody depends on the goods and services supplied by businesses. A business is thus an enterprise whose goal is to earn income/profit through supplying the demand of the pubic

3. Government -

Exists to create a free and fair economic environment

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Must provide legal framework for market economy to operate freely and fairly and effectively

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Ensure fair competition - the basic regulatory mechanism in the market system. It is the source that ensures that business operates under market sovereignty, since they are ultimately the buyer

4. Foreign Sector -

No economy can exist in isolation from the foreign sector

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Open economy is a country dependent on international trade, but is thus also dependent on the global economy

Product Market: -

Where goods and services are bought and sold

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Firms sell and household buy

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Revenues for Business

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Consumption for households

Resource Market: -

Where resources are bought and sold

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Households sell and firms buy

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Cost to business; wage; rent; interest and profit

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Households receives income

Financial Market: -

Takes care of the flow of surplus funds in the economy

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Where savings and investments are made

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Households save

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Firms borrow money to make investments

The Circular Flow: how they interact

• The mechanics of the circular flow model;

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The circular flow diagram shows the 2 most important decision makers in the economic system - firms and households - are connected to each other with flow of real economical objects, as well as financial objects.

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Households are the primary owners of production factors - land; labour; capitol; entrepreneurship - whose services they make available to the firms sector

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Firms pay households in exchange for this, which is thus the households income

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Firms use (demand) production factor services (basically households) in order to produce goods and services - which are then sold to the households

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Households purchase these goods and services through using the production factors owned by them

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There is thus a continuous flow of real objects and financial objects. It depicts the complicated activity of firms and households

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Business buy resources and sell products, households are vice versa

• The difference between a command system and a market system Economic system- a particular set of institutional arrangements and a coordinating mechanism The above will respond to the economising problem (The foundation of economics is the economizing problem: society's material wants are unlimited while resources are limited or scarce. Unlimited wants (the first fundamental fact): Economic wants are desires of people to use goods and services that provide utility, which means satisfaction) Each society needs to determine, which is determined through the economic system -

Which products to produce

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How to produce them

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Who gets these products

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How to accommodate change

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How to promote progress

Resource Economic systems differs in that/informs 1 - who owns the factors of production 2- Who owns the method motivate and coordinate and direct economic activity Economic systems have 2 polar extremes - market and command system

The Command Sytem i.e socialism or communism - government owns most property resources and all decisions runs through central economic planning board The Pure Market System/ pure capitalism - private ownership of resources and the use of market and prices to direct economic activity -

Participants pursue their own self interest

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Goods and services are produced by whoever is willing and able to make them

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Markets determine what will be produced for society and at which prices

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Government is limited to only protecting private property rights

The result is a competition against independent buyers and sellers

The Mixed Sytem: -

Government provides rules for the economy to ensure stability and growth

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The dominant economic force is the market in deciding on production

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The government ensures that social desires are met that would otherwise not be through a pure capitalist system

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Thus private and public sectors influence the economy

• The main characteristics of the market system; Market Systems Characteristics: -

Private Property: Private individuals and firms own most of the resources and property -

Property rights encourage investment, growth and innovation

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Property rights also includes intellectual property

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Property rights also facilitates exchange

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Freedom of enterprise: Entrepreneurs are free to use economic resources to provide goods and services and sell to the market of their choice

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Freedom of choice: Owners can enable or dispose of their property/money as they see fit. Workers can enter any line of work they are qualified in. Consumers are free to buy all goods their budget can accommodate

(All the above is allowed in broad legal limitations) -

Self Interest: Is the motivating force of various economic units as they express free choices, it gives consistency -

You achive your own goal of producing goods or services for others - maximize profit and minimize loss

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Competition: freedom of choice exercised in pursuit of monetary return -

You need 2 or more buyers and sellers in a particular resource/goods market

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Freedom of buyers or sellers to enter or leave the economic market based on self interest

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Competition minimises monopoly, and therefore the singular dication of prices

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Freedom of entry and exits provides stability, and allows freedom to adjust to consumer tatses

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Competition forces for innovation and the stability of pricing, thus the ultime stabilising factor

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Markets and Prices: -

Millions of household and business decisions are coordinated with one another by markets and prices, which are key components of the market system

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A market is a mechanism that brings buyers and sellers together

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A market conveys the decisions of buyers and sellers of products and resources

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These decisions guide the market as they revise their choices and look into their self interest - it is thus also a organising and regularity system - basically an elaborate communication network

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Technology and capital goods: All the above provides motivation for technological advance. More efficient producers reap greater benefits

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Specialisation: Efficient production requires specialisation

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Devision of labor: Human specialisation aides in the output of resources, thus taking advantage in the difference of abilities within a society...