Economics: Fundamental Concepts

Economics

• Economics is the study of our changing world
• Chapter 1 introduces the fundamental concepts and tools used in economics

Key Concepts

• Economics can be defined and differentiated into microeconomics and macroeconomics
• Microeconomics studies the choices made by individuals and businesses, their interactions in markets, and governmental influences
• Macroeconomics studies the performance of national and global economies
• Choices determine what, how, and for whom goods and services are produced

Two Big Questions

• South Africa's service sector accounts for two-thirds of its production, encompassing retail, wholesale trade, healthcare, and education
• Goods make up an increasingly smaller portion of total production
• In 1946, the primary sector (agriculture and mining) constituted 24% of the South African economy, now reduced to 8%
• The secondary sector (mining, construction, and manufacturing) has grown from 14% to 24%
• Goods and services require productive resources known as factors of production

Factors of Production

• Factors of production can be grouped into land, labor, capital, and entrepreneurship
• People derive income from these factors
• Land earns rent
• Labour earns wages
• Capital earns interest
• Entrepreneurship earns profit

Self-Interest and Social Interest

• A choice is in your self-interest if you believe it is the best option for you
• Choices that benefit society as a whole are considered to be in the social interest
• Questions about social interest can be answered by assessing globalization, the information-age economy, climate change and economic instability

Economic Thinking

• Choices always involve trade-offs
• A trade-off requires exchanging or sacrificing one thing for another
• Rational choices weigh costs against benefits to maximize net benefit
• Benefit is evaluated by preferences
• Opportunity cost is the value of the best alternative you must give up
• The opportunity cost consist of things you can't afford and how you spend your time

Choosing at the Margin

• Marginal benefit is the gain from increasing an activity
• Marginal cost is the opportunity cost of increasing an activity
• Economists think that everyone acts in their own self-interest
• Incentives are used to predict choices individuals make based on self-interest
• Incentives can reconcile self-interest with social interest
• Institutions play a crucial role in influencing incentives, therefore promoting social interest alongside self-interest

Economics as Social Science

• Economics uses positive and normative statements
• Economics studies cause and effect
• Economics avoids the fallacy of composition
• Economics avoids the post hoc fallacy

Economics as Policy Tool

• Economic policy questions mix positive and normative elements
• Economics can't determine normative goals, it provides methods for comparing the marginal benefits and costs of alternate solutions to find the solution that makes the best use of resources

Graphing Data

• Scatter diagrams plot one variable's value against another
• Breaks indicate jumps from the origin to the first recorded values
• Breaks can also mislead
• A diagram that shows the relationship between two variables show they have a correlation

Graphs in Economic Models

• Positive relationships are represented graphically by a line that slopes upward
• A relationship between variables that move in opposite directions is inverse
• In some relationships, variables can have a max or minimum
• Variables can be unrelated, meaning one remains constant

Slope in Economic Models

• The slope of any relationship is the change in the y-axis variable divided by the change in the x-axis variable
• A straight line's slope is the same everywhere
• To calculate the slope at the point of a curve, develop a straight line that matches the slope
• An arc is defined to be a piece of a curve

Relationships Among Variables

• Ceteris paribus means "if all relevant things remain the same"
• Ceteris paribus isolates a relationship in a laboratory experiment
• Economists graph a relationship by this method
• A change in y divided by a change in x represents the equation's slope

Equations

• The equation has a straight-line relationship when x and y is y = a + bx
• The y-axis intercept determines the line's position on the graph; positive relationships have a positive slope
• Negative relationships exist when x and y move in opposite directions