Basic Economic Concepts

Basic Economic Concepts

• Introductory economics covered in Lecture 1.
• Economics is explored as a social science.
• The methodology used in economics is touched up.

What is Economics?

• How individuals and societies allocate scarce resources to meet needs and wants is studied.
• Key terms include scarcity, choice, and opportunity cost.
• Scarcity relates to the limited availability of resources in relation to unlimited wants and needs.
• Choice involves decision-making among uses of resources.
• Opportunity cost is the value of the next best foregone alternative when a choice is made.

Economics as a Social Science

• Human behavior and decision-making are dealt with.
• Resource allocation and societal impacts are studied.
• It involves observation, hypothesis, and analysis of social phenomena.

Microeconomics vs. Macroeconomics

• Microeconomics emphasizes individuals and businesses.
  • Consumer behavior and market dynamics are examples.
• Macroeconomics examines economies on a large scale.
  • GDP, inflation, and unemployment are examples.

Positive and Normative Economics

• Positive economics is objective and fact-based.
  • An unemployment rate being 6% is a possible example.
• Normative economics is subjective and value-based.
  • The government reducing taxes is used as an example.

The Methodology of Economics

• Steps in economic analysis include observing economic activity, formulating hypotheses, testing hypotheses through data and models, and drawing conclusions.
• Graphs, models, and statistics are used.

Applications of Economic Methodology

• Policy-making includes governments implementing a carbon emissions tax to reduce pollution and encourage clean energy.
• Business strategies include automating technology to increase production efficiency and reduce labor costs.
• Environmental economics includes cities introducing recycling programs to manage waste and reduce landfill usage, while promoting sustainability.

Summary of Key Points

• Choices and resource allocation are what economics is about.
• Economic activity is explored at different scales in both micro and macroeconomics.
• Fact-driven is related to positive economics.
• Opinions are related to normative economics.
• Economic analysis is related to methodology is crucial

The Fundamental Economic Problem

• Resources are limited, but human wants are unlimited.
• Choices are made to allocate resources efficiently.

Key Concepts - Scarcity, Choices, Needs vs. Wants

• Scarcity means limited resources to meet unlimited wants.
• Choices are decisions made because of scarcity.
• Needs are the essentials for survival as an example, food, water and shelter.
• Wants are desires beyond survival as an example, luxury cars and vacations.

Basic Economic Questions

• The 4 key economic questions are:
  • What to produce?
  • When to produce?
  • How to produce?
  • For whom to produce?
• Deciding which goods and services to produce with limited resources is what "What to produce?" means.
  • Whether countries should produce more healthcare services or luxury goods is an example.
• Timing production based on demand, seasons, or economic conditions is what "When to produce?" means.
  • Producing winter coats in the summer to prepare for winter demand is an example.
• Deciding the methods and technologies to use in production is what "How to produce?" means.
  • Using machines vs. manual labor to produce cars is an example.
• Deciding who gets the goods and services produced is what "For Whom to produce?" means.
  • Whether luxury goods should be available only to the wealthy, or whether basic needs should be distributed equally is an example.

Technological Choices and the Production Possibility Frontier (PPF)

• The PPF shows the maximum production of two goods with given resources and technology.
• Concepts related to PPF:
  • Efficiency is producing on the PPF like when by using all resources fully.
  • Inefficiency is producing inside the PPF like when unemployment or wasted resources are present.
  • Economic growth is expanding the PPF outward when better technology or more resources are available.
• All points on or inside the frontier are attainable.
• unattainable.
• Points on the PPF (A, B, C, D) are efficient when all resources are fully used.
• Moving from A to B, the economy sacrifices 1,000 cavans of Palay to produce 200 cars.
• Moving from B to C, another 1,000 cavans of Palay is given up for 200 more cars.
• The opportunity cost of producing more cars is represented.
• Any point inside the PPF is inefficient when resources are underutilized.
• With current resources, any point outside the PPF is unattainable.
• Concave nature reflects the law of increasing opportunity cost. As more cars are produced, more Palay must be sacrificed. This is the reason.
• The opportunity cost increases, which is why the PPF is concave.
  • If technology improves or resources increase, the PPF shifts outward, which denotes more production.
• If resources decrease, the PPF shifts inward meaning less production.

Straight Line PPF

• With a straight-line PPF the opportunity cost is constant, indicating that resources are perfectly adaptable for producing either good.
• The opportunity cost remains constant (2 bookshelves per desk) at every stage.
• Straight-line PPFs indicate that resources are equally efficient in producing both goods.
• Unlike a curved PPF (which shows increasing opportunity cost), trade-offs are always the same.
• Hiring a new worker can cause economic growth, as more goods can be produced with the same resources.

Opportunity Costs

• The value of the next best alternative that is given up when making a choice.
• A possible example is choosing to study instead of working meaning the wages you could have earned are being sacrifised.

"There's No Such Thing as a Free Lunch"

• A trade-off and opportunity cost is involved with every choice.
  • Free healthcare is possible examples of costs of trade offs.

Economic Systems

• Economic Systems refer to the ways in which societies organize and allocate resources to produce and distribute goods and services.
• These systems determine how economic decisions are made and who controls the factors of production (land, labor, capital).
• The four main types of economic systems are:
  • Traditional
  • Command
  • Market
  • Mixed
• Traditional Economy's decisions are based on customs, traditions, and cultural beliefs. Production and distribution are usually family-based or community-based.
• Command Economy's decisions are controlled by the government over the production, distribution, and pricing of goods and services. Central planning is key.
• Market Economy's decisions are made by individuals or businesses based on supply and demand. Prices are determined in a free market.
• Mixed Economy combines both elements of market and command economies. The government may intervene in some sectors, while others are left to market forces.