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The foundations of economics

Economics deals with human society and behaviour, making it a social science. It deals with the
study of choices, leading to the best possible use of scarce resources and best-satisfying human's
unlimited needs and wants.

Microeconomics is the study of individual decisions making units of an economy

Macroeconomics is the study of the whole economy to obtain a broad picture of the economy.

KEY CONCEPTS:
- Scarcity: there exist insufficient resources to satisfy everybody’s wants
- Choice: choices must be made about what to produce, and what will be forgone.
- Efficiency: making the best use of scarce resources to prevent waste
- Equity: is the idea of being fair.
- Economic well-being: refers to the satisfaction, prosperity and standard of living of the
people within an economy
- Sustainability: refers to the long-term maintenance of a particular activity or policy.
- Change: can be distinguished in two ways -
- Economic theory: wherein we compare a change in one situation to another, caused
by a change in other variables
- Real-life events: change in technology, culture, social events, etc.
- Interdependence: refers to the idea that economic decision-makers depend on and interact
with each other.
- Intervention: suggests when governments become involved with markets

FACTORS OF PRODUCTION:
- Land: refers to all natural resources such as coal, oil, forests, etc.
- Labour: refers to the physical and mental contribution to the production of goods and
services
- Capital: man-made products that aid in the production of goods and services
- Entrepreneurship: the risk-taking ability of an individual to combine all the factors of
production, to run a business

Opportunity cost refers to the value of the next best alternative that must be sacrificed to obtain
something else. The existence of scarcity is what forces people to make a choice.

The three basic economic questions:

- What to produce: what particular good and how much of it should they produce
- How to produce: how to efficiently produce given the scarce nature of resources
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- Whom to produce for: how the goods and services should be distributed to the population

Resource allocation refers to assigning scarce resources to specific uses

Distribution of income focuses on how a country's total GDP is distributed amongst its population
Redistribution of income is when the distribution of income changes, so that different social
groups receive more income than they did before.

Free market economy: follows the market approach [ hardly any government interaction]
Planned economy: follows the command approach [legislations govern the economy]
Mixed economy: follows markets and command approach

Rationing is the method of apportioning or dividing something up between its interested users

A production possibility curve [PPC] is a diagrammatic representation of the combinations of

the maximum amount of goods and services that can be produced with the given resources at
hand.

Efficiency means that all resources are used to their maximum capacity and in the best possible
way.

What each point on the PPC means:

A→ all resources are used to produce microwaves

B→ majority of resources are used to produce microwaves
C→ equal use of resources on both sides
D→ majority of resources are used to produce computers
E→ all resources are used to produce computers
F→ resources are unemployed or not being used efficiently
G→ exploiting resources

The reason why the PPC is curved is that, in a real economy,

opportunity costs increase or decrease with every decision
made.

Economic Growth is when there is an increase in the quantity

of output produced in an economy over a period of time.

Positive Economics is when one tries to describe or predict economic events

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Normative Economics is based on beliefs and judgements about what an economic policy ought
to be.

*Note: read thru the theory’s in the tb*

Competitive Markets: Demand and Supply

Demand is the willingness and ability of an individual/ customer to buy a particular good or
service.

The law of demand dictates that demand and price share an indirect relationship. When demand
increases, price decreases and vice versa.

Market demand refers to the sum of all individual demands for a

good.

Non-price determinants of Demand: income in the case of everyday

goods, Income in the case of inferior interests, preferences and tastes,
price of a substitute good, price of complementary goods, number of
customers

Supply is the willingness and ability of producers to produce a

particular good or service at a given period of time.

The law of supply dictates that demand and price share a direct relationship. When supply
increases, price increases and vice versa

Market supply refers to the sum of all individual firm’s supplies for a
good or service

Non-price determinants of supply: cost of FOP, technology, price of

related goods, taxes, subsidies, unpredictable or black swan events

Law of diminishing marginal utility: