Chapter Text
- What is economics?
- The study of how people, both individually and collectively, make choices in the presence of scarce resources
- How we allocate scarce resources to satisfy human needs and wants
- Scarcity
- The inability to satisfy all human wants and desires with the available resources
- Refers to the limitless of resources
- Exists via nature
- Permanent situation
- Not the same as a shortage
- Shortage is a market phenomenon
- Bids exceeding offers
- Temporary situation
- Referring to goods and services
- Resources
- Things of value to produce other things
- Land: Forests, minerals, water, ocean access
- Labor: Physical/mental efforts to provide/produce
- Capital
- Physical Capital: Machines and equipment
- Human Capital: Knowledge and skills from training and education
- Economic Insights
- People are rational and self-interested
- Rational: People will make the best decisions given the information given to them
- Rational people think at the margin
- Thinking at the margin is also known as marginal analysis
- Rational people make decisions by comparing incremental costs and incremental benefits
- Incremental costs: marginal cost
- Incremental benefits: marginal benefits
- Marginal analysis requires that we ignore sunk cost
- Sunk cost is the cost incurred and can not be recovered regardless of the decision made
- People respond to economic incentives
- Incentives are penalties and awards that influence human behavior
- They change marginal cost and marginal benefits of our actions
- Fundamental Economic Choices
- What and how much to produce
- What goods and services should be produced
- How much of each good and service should be produced
- How to produce
- Method of production
- Labor intensive vs. capital intensive
- For whom to produce
- How much products are distributed or allocated among members of society
- The role of economic systems
- An economic system are rules that govern ownership and use of resources
- Two opposing systems
- Planned (command) economy
- Resources are communally own
- Central planners (government) determine what, how much, how, and for whom goods are produced
- Less competition
- No competition allows for less choices
- Price system
- Also known as a market system or capitalism
- Resources are mostly privately owned
- Decision-making is highly decentralized
- Individual decision-making
- Business compete and sell goods and services at prices determined by the market
- Market sets the prices
- Prices reflects resources
- Market crises are inevitable in this system
- Mixed system
- Incorporates aspects of both command and market systems
- Most economies of the world are mixed economies
- Scopes of economics
- There are two majors divisions of economics
- Microeconomics
- Studies individual decision-making agents
- Ex: a business, a single person, etc.
- Macroeconomics
- Studies the economy in its entirety
- Deals with sums or aggregates
- Like trees (micro) versus forests (macro)
- Positive and Normative Economics
- Positive economics
- Studies behavior and the operation of systems without making judgements
- Describes “what is” and “how it works”
- Normative economics
- Judgmental
- It analyses the outcomes of economic behavior
- Evaluates what is “good” and “bad”
- May also prescribe a course of action
- Describes “what should be” or “what ought to be”
- Studying economics
- Understand the significance of “thinking at the margin” and therefore making better choices
- Recognize the role of opportunity cost in decision-making
- Be equipped to analyze socio-economic and political issues of the day
- Gain insights into how people make decisions and interact as consumers and producers.