Chapter 1

Last updated Sep 12, 2023 Edit Source

Economics deals with two basic facts.
People are faced with limited resources
People have unlimited wants
This is the Basic Economic Problem (BEP)
The BEP is a problem of both and choice
To formalise, ‘Economics is the study of how people allocate their limited resources to satisfy their unlimited wans - the study of the economic problem, which is one of scarcity and choice.’
To solve the BEP, three basic questions should be answered;
What to produce?
How to produce?
For whom to produce?
In doing so, economics is a social science
Wants are unlimited, recurring, complimentary (iphone -> airpods), specific to a person, location and time, and have varying levels of importance

Anything that has a price is scarce.
Free goods are those that are not relatively scarce and do not have a price (for example, air breathed)
It is important to not confuse scarcity with a shortage
A shortage occurs when the supply of something is limited
Scarcity is the fundamental issue of infinite wants

Because of scarcity - because of the limited resources, we must choose between one option or the other
For example, I have the limited amount of $15 - do I a) Go to the movies or b) Go to a restaurant?
Making choices when confronted by scarcity involves a trade-off

This all leads into the concept of opportunity cost.
Choice, as demonstrated above, must exist due to the BEP
Because of this, whenever making a choice, we are sacrificing any other choices we could have made
Opportunity cost is therefore the value of this other choice - the value of the next best alternative foregone
The PPF is one of many which describes opportunity cost
The PPF can also illustrate economic growth through shifts right and left

There are three main types of resources, also known as factors of production
Natural
Human
Capital

The subject matter of economics is divided into micro and macroeconomics
Macroeconomics deals with the economic problem from society’s point of view
It is concerned with the performance of the whole economy
Microeconomics deals with economics from an individual point of view - referring to a small perspective

A simplified representation of economic reality showing the relationship between certain economic variables
Not inclusive of all detailed; simplified to show key correlations
It is assumed that people have rational self-interest - that economic decisions are based on a person following a logical process
Rationality is determined as benefit exceeding cost
Price is useful for measuring both

Beside developing models, developing theory is known as positive economics - ‘what is’ in the economy
On the other hand, normative economics is the domain of ‘what should be’ - largely opinionated
Normative statements involve a value judgement - an opinion that one situation is preferable above another

Notes v3