CHAPTER 1 – LIMITS, ALTERNATIVES AND CHOICES
I. THE ECONOMIC PERSPECTIVE.
I. Scarcity and choice
a. ‘Opportunity cost’; the cost of forgoing the next best thing to obtain something.
II. Purposeful behavior
a. Human behavior reflects rational self-interest, to increase their utility.
b. People make decisions based on a desired outcome.
III. Marginalism (benefit vs. cost)
a. Marginal = extra/additional/a change in.
b. Every decision is the result of weighing marginal benefit and marginal cost.
c. What will give me the most [happiness, results etc.]?
II. THEORIES, PRINCIPLES AND MORE.
Economics relies on the scientific method:
1. Observing (real-world behaviors + outcomes);
2. Hypothesis (based on observations);
3. Testing (by comparing actual outcomes to the predicted hypothesis);
4. Accepting, rejecting or modifying the hypothesis.
5. Testing (more which might lead to a theory, which could evolve into
laws/principles/models.)
Some more characteristics of economic principles:
a. Generalizations – economic principles are generalizations of economic behavior/the
economy.
b. Other-things-equal assumption (ceteris paribus) – assume that all other variables apart
from those under immediate consideration are held constant.
c. Graphical expressions – many economic models are expressed in graphs.
III. MICROECONOMICS AND MACROECONOMICS.
Microeconomics – concerned with decision making by consumers (individuals, households,
business firms).
Macroeconomics – concerned with the observation of the economy as a whole or its basic
subdivisions/aggregates.
Aggregate – a collection of specific economic units treated as if they were one unit.
IV. INDIVIDUALS’ ECONOMIC PROBLEM
People need to make choices because economic wants are unlimited, but the economic means
for satisfying those desires are limited.
Limited Income
Everybody has a finite amount of income, no matter how wealthy one may be.
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, Unlimited Wants
People have virtually unlimited wants, which extend over a wide range of products or services.
These may be subdivided into necessities (food, shelter) and luxuries (perfumes, yachts).
These wants tend to evolve and multiply over time due to new and improved products (Wi-Fi
etc.).
For most/all people their desires for certain products/services cannot be satisfied relates
back to the economic perspective (marginal benefit/cost analysis and opportunity cost).
Budget Line
Relates to the economic problem, facing individuals. Depicted in either a graph or table in which
all the combinations of any two products which a specific individual may buy with a certain
income are illustrated.
The budget line illustrates a number of ideas:
1. Attainable and unattainable combinations – all the combinations on or inside the budget
line are attainable. All combinations outside the budget line are unattainable.
2. Trade-offs and opportunity costs – to be able to buy one product, you must give up some
of the other product. The budget line has a straight opportunity cost (usually), which means
there is a constant opportunity cost.
3. Choice – limited income forces people to choose what they want to buy and what to forgo.
4. Income changes – an increase in income shifts the line to the right and a decrease in
income shifts the line to the left.
V. SOCIETY’S ECONOMIC PROBLEM
Scarce Resources
Economic resources = all natural, human, and manufactured resources that go into the
production of goods and services (e.g. labor, mineral resources etc.).
Resource Categories
a. Labor
b. Land
c. Capital
d. Entrepreneurial ability
VI. PRODUCTION POSSIBILITIES MODEL
Assumptions made for the PPM:
a. Full employment
b. Fixed resources
c. Fixed technology
d. Two goods
i. Consumer goods – satisfy our wants directly.
ii. Capital goods – satisfy our wants indirectly.
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, The PPT (Production Possibilities Table) reflects the opportunity costs at production
alternatives.
The PPC (Production Possibilities Curve) is a graphical representation of the PPT. each point on
the PPC represents some maximum output of the two products and is a ‘constraint’.
Law of Increasing Opportunity Cost
The more of a product that society produces, the greater is the opportunity cost of obtaining an
extra unit. Some characteristics of this law are that…:
d. … this law is reflected in the shape of the curve.
e. … this law is driven by the fact that economic resources are not readily adaptable to
alternative uses.
Optimal Allocation
This may be determined by the marginal cost/benefit analysis. If marginal benefit and marginal
cost are graphed, the point of intersection (MB = MC) of the curves is the point of optimal
allocation.
Unemployment
This may be represented in the graph as a point inside the curve (U), as the economy produces
less in the case of unemployment.
Growth
a. Increases in resource supplies – even though these are fixed at any specific moment, they
change over time.
b. Advances in technology.
Conclusion: economic growth is the result of (1) increases in supplies of resources, (2)
improvements in resource quality, and (3) technological advances.
Present Choices and Future Possibilities
Goods for the future = capital goods.
Goods for the present = consumer goods.
An economy based on present choices favors consumer goods (P).
An economy based on future choices favors capital goods (F).
F
F
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, CHAPTER 2 – MARKET SYSTEM AND THE CIRCULAR FLOW
III. ECONOMIC SYSTEMS
Market system (capitalism)
a. Private ownership of property and resources. Consequences:
- Encourage people to cooperate.
- Encourages investment, innovation, exchange and economic growth.
- Encourages people to create and invent (intellectual property rights).
- Facilitates exchange.
- Encourages owners to improve and maintain their property.
b. Markets and prices determine economic activity.
- Gives the system its ability to coordinate millions of daily economic decisions.
- Market = an institution that brings buyers and sellers together to interact.
Pure market system/capitalism = ‘laissez-faire’: no gov’t intervention, as this would
disturb economic activity and the efficient working of the market system.
o In practice there is no such thing as pure capitalism as the government plays a
substantial role in the economy (e.g. promotes economic stability and growth).
Key characteristics:
1. Freedom of enterprise – ensures that entrepreneurs and private businesses are free to
obtain and use economic resources to produce their choice of goods and services and to sell
them in their chosen market.
2. Freedom of choice – enables owners to employ or dispose of their property and money as
they see fit.
3. Self-interest – the motivating force of the various economic units as they express their free
choices.
4. Competition – is a result of private ownership/self-interest etc. and requires:
a. Independently acting sellers and buyers operating in a particular product or resource
market.
b. Freedom of sellers and buyers to enter and leave markets.
5. Technology and capital goods – competition, freedom of choice, self-interest and personal
reward provide the opportunity and motivation for technological advance.
6. Specialization – market economies rely heavily on specialization. It increases society’s
output. In this case specialization refers to comparative advantages etc. two examples of
such specialization are:
a. Division of labor – practicing one thing rather than a number of things (specialization
and time saving).
b. Geographic specialization – (think of comparative advantages i.e. different goods such
as foods depending on certain types of weather).
7. Use of money – used as a medium of exchange, rather than barter (swapping goods) as
bartering might be difficult because it requires a ‘coincidence of wants’ and it can be difficult
to give certain goods a clear/set value.
8. Active, but limited, government – government intervention is required to achieve a fully
efficient market system (see chapter 5).
Command sytem (communism)
a. Government owns most property and resources;
b. ‘Central economic plan’ determines economic activity.
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