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Summary Economics chapter 1- 4 summaries
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EKN 110CHAPTER 1 (Note to whoever is using these notes, you going to memorise your
a** off)
Economics:
It is the study of how individuals, business and institutions make social choices to
optimize their level of satisfaction under conditions of scarcity.
The Economic Perspective (economic way of thinking):
Opportunity cost - The opportunity cost of an activity is the value of the next
best alternative that must be forgone in order to undertake this activity, i.e.
gaining one thing at a loss of another.
Rational (purposeful) behaviour –
‘Rational self-interest’ is an assumption of economics.
Decisions not free from mistakes or unaffected by emotions or feelings.
Desire to maximize level of satisfaction (utility).
Simply means that people make decisions with some desired outcome in
mind.
Rational consumers - Greatest possible satisfaction (U) with unlimited
wants/needs and certain budget constraints.
Rational producers - Maximum profit with cost constraints and certain
production techniques.
Utility (U) - Is the pleasure, happiness or satisfaction obtained from consuming a
good or a service. Concepts of utility: (Economists too lazy to say satisfaction)
Cardinal (measurable) vs. ordinal (comparative).
Choose between options to max U.
Allocation of time, energy and money.
Marginal analysis: Marginal Benefits and costs.
Marginal = “extra”, “additional” or “a change in”.
, Decision to obtain the marginal benefit associated with some specific
option always includes the marginal cost of forgoing something else (i.e.
opportunity costs present).
Theories, principles and models:
Scientific method - the process used to study, explain, and
analyse economic phenomena.
Economic principles – useful in analysing economic behaviour and
understanding how the economy operates. Tools for ascertaining cause and
effect (action and outcome): (notice the sad face, I don’t like economics).
Generalizations - Tendencies of typical or average consumers, workers
or business firms (when buying goods with price rises or falls).
Other-things-equal assumption (ceteris paribus) – the assumption that
factors other than those under immediate consideration are held constant
for a particular analysis.
Graphical expression – economic models are expressed graphically.
Macro and micro economics:
Macroeconomics Microeconomics
It examines either the economy It is concerned with individual
as a whole or its basic units such as a person, a
subdivisions or aggregates. household, a firm or an
industry.
Examples: government, households Examples: a sole proprietor and a
and business sectors. single household.
Positive and normative economics:
Positive economics:
It focuses on facts and cause and-effect relationships.
Description, theory development and theory testing.
, Normative economics:
It incorporates value judgments about what the economy should be like.
Expressions of support for particular policies.
An individual’s economizing problem:
Limited income and unlimited wants – limited income received with unlimited
wants to provide utility (U).
A budget line – It is a schedule or curve that shows various combinations of two
products a producer can purchase with a specific money income.
Attainable and unattainable combinations – Points that show whether the
consumer can buy or not the specific combination of products. Example:
Quantity of *Y*
Unattainable
Attainable
Quantity of *X*
Trade-offs: sacrifice quantity of one for the other.
Opportunity cost always present in budget line.
If consumer income changes:
Increases: graph will move up as more good can be purchased.
Decreases: graph will move down as less goods can be purchased.
, Society’s economizing problem: (Government should be one)
Scarce resources: society has limited or scarce economic resources.
Resource categories: (also called factors of production or inputs)
Land – natural resources used in the production process such as water
resources.
Labour – physical and mental talents used in producing goods and
services.
Capital – includes all manufactured aids used in producing consumer
goods and services. Example tools and machinery. The purchase of
capital goods is called an investment.
Entrepreneurial ability – special human resource who performs several
functions such as:
Combining resources of land, labour and capital to produce a
good or service.
Makes strategic business decisions that set the course of an
enterprise.
Is an innovator i.e. introduces new products, production
techniques and new forms of business organizations.
Is a risk bearer, has no guarantee of profit. Risks his, associates
and stockholders funds.
Production Possibilities Model:
Shows alternatives and choices society faces. Assume the following:
Full employment in the type of economy.
Fixed resources, the quantity and quality of the factors of production remains
fixed.
Fixed technology, the state of technology is constant.
Two goods that the economy is producing.
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