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Economics notes; chapter 1-10
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Economics notes; chapter 1-10 with 1. Detailed explanations and key concepts in each chapter. * Comprehensive * Legible * For students For you
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EKN NotesChapter 1
Limits, Alternatives and Choices
The Economic Perspective
Envisions individuals and institutions making rational decisions by comparing the marginal
benefits and marginal costs associated with their actions
Scarcity and Choice
o Scarcity restricts options and demands choices
Opportunity Costs
o So-called ‘free lunch’ is never free
o The amount of product that must be forgone/sacrificed to produce a unit of product
Rational Behaviour
o Utility – the pleasure, happiness or satisfaction obtained from consuming goods or
services
o Weighing the costs and benefits
o Does not assume immunity from faulty logic
o Rational self-interest is not the same as selfishness, it is behaviour designed to
increase personal satisfaction
Rational Consumers
o Maximises utility subject to a budget constraint
o Ordinal utility – immeasurable, but the consumer knows when they derive more
utility from one product than another
o Cardinal utility – utility measured on a scale of utils
o Products chosen and quantity bought must provide the consumer with the greatest
possible total utility
o Essence of optimal behaviour – calculation, negotiation, and expenditure
Rational Producers
o Seek to maximise profit of the firm
o Two ways of reasoning:
Determine the quantity of goods or services to be produced and then try to
do so cost-effectively
Determined the sum of money that may not be exceeded during production
and then try to produce as much as possible within this budget
Marginal Analysis: Benefits and Costs
o Marginal Analysis – The comparison of marginal (extra/additional) benefits and
marginal costs, usually for decision making
o Obtaining marginal benefit with one option always includes the marginal cost of
forgoing something else.
o Is it worthwhile doing?
o Opportunity costs are present whenever a decision is made
,Theories, Principles and Models
Scientific Method and Principles
o Scientific Method – The procedure for the systematic pursuit of knowledge involving
the observation of facts and the formulation and testing of hypotheses to obtain
theories, principles, and laws
o ‘Rational simplifications’
o Economic Principles – a widely accepted generalization about the economic
behaviour of individuals or institutions
Generalizations – economic principles are expressed as the tendencies of
typical/average consumers (e.g., Consumers buy more of a particular
product when its price falls).
Other-things-equal assumption/Ceteris Paribus – the assumption that factors
other than those being considered are held constant.
Graphical expression
Macroeconomics and Microeconomics
Macroeconomics
o The part of economics concerned with the economy as a whole; with such major
aggregates as the household, business, and government sectors; and with measures
of the total economy.
o Aggregate – A collection of specific economic units treated as if they were one (e.g.,
all prices of individual goods and services are combined into a price level, or all units
of outputs are aggregated into gross domestic product).
Microeconomics
o The part of economics concerned with decision making by individual units and with
individual markets, specific goods and services, and product and resource prices.
Macro-micro distinction does not mean that every topic can be readily label as either macro
or micro; many topics and subdivisions of economics are rooted in both.
Positive and Normative Economics
Positive economics
o Focuses on facts and cause-and-effect relationships and avoids value judgements.
o The analysis of facts/data to establish scientific generalizations about economic
behaviour.
Normative economics
o Incorporates value judgements about what the economy should be like
o Focused on which economic goals and policies should be implemented
An Individual’s Economizing Problem
Economizing problem – The choices necessitated because society’s economic wants for
goods and services are unlimited but the resources available are limited
Limited income and unlimited wants
o Necessities – food, shelter, clothing
o Luxuries – perfumes, yachts, sports cars
o As new products are introduced, economics wants tend to change and multiply
, o Because we only have limited income but seemingly insatiable wants, it is in our self-
interest to economize (pick and choose things that create maximum utility)
A Budget Line
o A line that shows all the different combinations of two products a consumer can
purchase with a specific money income, given the products’ prices.
o Graph is not restricted to whole units
o Attainable and Unattainable Combinations
All combinations on or inside the budget line are attainable.
All combinations beyond/to the right of the budget line are unattainable.
o Trade-offs and Opportunity Costs
Arise from limited income
Budget line shows the opportunity cost of an extra unit of one good
o Choice
Limited income forces people to choose what to buy and what to forgo to
fulfil wants
Evaluate marginal benefits and marginal costs to make choices
o Income Changes
Location of budget line varies with money income
Increase in income shifts the budget line to the right
Decrease in income shifts the budget line to the left
Society’s Economizing Problem
Scarce Resources
o Society has limited/scarce economic resources
o Economic Resources – The land, labour, capital, and entrepreneurial ability that are
used in the production of goods and services; productive agents; factors of
production
Resource Categories - These are referred to as the factors of production, or simply ‘inputs’
o Land
Natural resources used to produce goods and services (E.g., Arable land,
forests, mineral and oil deposits, and water resources)
o Labour
People’s physical and mental talents and efforts that are used to help
produce goods and services
o Capital
Human-made resources used to produce goods and services; goods that do
not directly satisfy human wants; also called capital goods (e.g., buildings,
materials, and equipment)
Investment – spending for the production and accumulation of capital and
additions to inventories
Refers not to money, but to tools
o Entrepreneurial Ability
The human resource that combines the other resources to produce a
product, makes non-routine decisions, innovates, and bears risks
, Production Possibilities Model
Assumes:
o Full Employment
o Fixed Resources
o Fixed Technology
o Two Goods
Consumer Goods – Products and services that satisfy human wants directly
Capital Goods – Products that indirectly satisfy our wants by making possible
more efficient production of consumer goods
Production Possibilities Table
o Lists the different combinations of two products that can be produced with a specific
set of resources
o By moving towards consumer goods, society chooses ‘more now’ at the expense of
‘much more later’.
o By moving towards capital goods, society chooses ‘more later’ at the cost of ‘less
now’
o Generalization – at any point in time, an economy must sacrifice some of one good
to obtain more of another good.
Production Possibilities Curve
o A curve showing the different combinations of two goods or services that can be
produced in a full-employment, full-production economy where the available
supplies of resources and technology are fixed.
o Each point on the PPC represents some maximum output of the two products.
o Points on the curve are attainable if the economy uses all its available resources
o Points inside the curve are attainable, but they reflect less total output, therefore are
not as desirable
o Points beyond the curve are unattainable with the current availability of resources
and technology
o Bowed out from the origin of the graph, displaying the law of increasing opportunity
cost
Law of Increasing Opportunity Cost
o The principle that, as the production of a good increases, the opportunity cost of
producing an additional unit rises
Economic Rationale
o Economic Resources are not completely adaptable to alternative uses
o Lack of perfect flexibility on the part of resources is the cause of increasing
opportunity cost
Optimal Allocation
o MB = MC
o Achieving the optimal output requires the expansion of a good’s output until
MB=MC
Changes in the PPC
Unemployment and the Future
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