Economics: Scarcity, Choice, and Efficiency

• Economics studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy unlimited wants.

Four Elements of Economics

• Scarcity is the core economic problem caused by unlimited human needs and limited resources. It forces choices between alternatives. It can also be described as something difficult to find or in short supply.
• Choice results from scarcity and means selecting one alternative over another.
• Efficiency is achieved when resources are allocated to minimize waste.
• Equity refers to the equal distribution of resources, income and opportunities among people.

Macroeconomics vs. Microeconomics

• Macroeconomics studies the whole economy, or how the aggregate economy behaves. Examples include economic growth, unemployment and inflation.
• Microeconomics studies individual parts of the economy or market behavior of consumers and firms, and how they attempt to understand the decision-making process of firms and households. Examples include the price of a single product, and the interaction between buyers and sellers.

Branches of Economics

• Monetary economics concerns the policies of central banks and other financial institutions.
• Environmental economics focuses on how the health of the natural environment influences the development of the economy, and environmental problems such as climate change.
• Labour economics studies the demand and supply of labor markets.
• Public sector economics involves the role of the state in the economy.
• International economics studies world trade and includes international agreements.

Approaches to Economics: Monetarist vs. Keynesian

• Monetarist approaches are called the sunspot theory / exogenous approach. It believes that markets are stable, deviations from equilibrium are due to factors outside the market system, and governments should not interfere.
• Keynesian approaches also known as the endogenous approach or interventionism, believes that markets are unstable, the price mechanism fails to coordinate supply and demand, prices are not flexible enough, and governments must intervene in the markets.

Positive vs. Normative Statements

• A positive statement is an objective fact that can be proved or disproved. Statements include: The payment of social grants to people increase government expenditure and The national budget is tabled in February each year.
• A normative statement involves an opinion or value judgement that can't be proved or disproved. Statements include: The government should give social grants to people, The Monetary policy committee should decrease the interest rates by 1% and The price of red meat should increase because it will give farmers a better standard of living.

Use of Models in Economics

• Economists use models to simplify reality and improve the world's understanding.
• Models are used to do the following: describe how the economy and markets function, show past events, predict future events, simplify complex economic issues, and explain economic processes.

Economics in Relation to Other Fields

• Accountancy involves the recording and reporting of the financial transactions of a business.
• Business studies is an essential part of running all businesses, used to make decisions about the future.
• Commercial law governs business and commerce.
• Mathematics of finance deals with financial markets.
• Statistics is the science of collecting, classifying, and analyzing data.
• Mathematics is important in economics for calculations.
• Information Technology is used to for sorting, analyzing, and distributing information.
• Law consists of making rules and regulations to manage society.
• Geography overlaps with economics when dealing with population, environmental issues, and natural resources.
• Politics studies the role of government in the economy.

Alternatives, Trade-offs, and Opportunity Costs

• Trade-offs are all alternatives sacrificed when making a choice.
• Opportunity cost is the value of the best alternative that was not chosen.

Absolute vs. Relative Scarcity

• Absolute scarcity is when goods/services are unavailable, even with the resources to acquire them.
• Relative scarcity occurs when goods/services are available, but the resources to acquire them are lacking.

Economic vs. Free Goods

• Free goods are unlimited in quantity and do not command a price, only having a value in use.
• Economic goods are limited, command a price, and have both value in use and exchange value.

Basic Processes in Economics

• Production transforms resources into goods and services to satisfy needs.
• Exchange involves trade (selling and buying) for money in markets.
• Consumption is using goods and services.

Factors of Production

• Natural Resources: free gifts from nature.
• Labour: all human effort, mentally or physically. Is usually categorized as: Skilled, semi-skilled or unskilled.
• Capital: man-made resources used to produce more goods/services.
• Entrepreneurship: taking the initiative to start, organize production, and assume risk.

Production Sectors

• Primary Sector: raw materials are extracted, collected and cultivated.
• Secondary Sector: raw materials manufactured into goods/services.
• Tertiary Sector: service and trade section of the economy.

Capital vs. Labour Intensive Production

• Capital intensive production: capital equipment and machines are predominantly used, leading to potential unemployment.
• Labour intensive production: manual labour predominates, leading to more job opportunities.

Specialization and Division of Labour

• Specialization: concentration on activities best suited to one's abilities.
• Division of labour: breaking the production process into steps, each performed by a worker or team.

Categories of Consumption

• Non-durable goods: can only be used once.
• Semi-durable goods: last long, but must be replaced.
• Durable goods: can be used for years.
• Services: used to satisfy needs and wants.

Markets

• Markets are where trade happens, activities include exchanging information and settling on prices and quantities.

Economic Actors and Flows

• The economy involves production, distribution, and consumption.
• Participants are producers, sellers, and consumers.

Circular Flow Model

• Shows the relationship between income, production, and spending in the economy. The basic purpose is to show how the money moves within an economy.
• A closed economy excludes the foreign sector, one that does not take part in international trade.
• An economy includes the foreign sector, and takes part in international trade.

Participants in a Closed vs. Open Economy

• Closed Economy: households, businesses, government.
• Open Economy: households, businesses, government, foreign sector.

Household, Business and Government Participants

• Households own factors of production, sell them to businesses and receive income (wages, rent, interest, profit). They then in turn purchase the goods and services from businesses.
• Businesses buy factors of production from households to produce goods and services, and pay household in income.
• Government provides public goods/services to households and businesses.

Government Participants

• Households pay taxes and a portion of this tax income is in turn spent by the households.
• Businesses pay taxes and government purchases the goods and services from businesses.

Foreign Sector

• Imports: inflow of goods or money from the foreign sector to a domestic businesses, households and governments. The outflow of money for imports is considered a leakage.
• Exports: an outflow of goods or money (spending) from businesses of the country to the foreign sector. The inflow of money for exports is an injection.

Activities of the Financial Sector

• It provides a link between households and firms for any surplus money and supplies others in the economy who require funds.
• It provides facility and interest

Savings, Investment, Injections, and Leakages

• Investment: spending by firms on capital goods.
• Receipts from exports: Goods and services produced locally and then sold to foreign countries
• Government Expenditure: Buying of goods to provide a public good or service, eg roads *these are considered as INJECTIONS
• Savings: when households do not spend some of their income, these are considered as withdrawals.
• Payment for imports: goods and services produced in other countries and bought by local firms or households.
• Taxes: compulsory payments individuals or firms make to the government with no direct benefit. *these are considered as WITHDRAWALS

Market Equilibrium

• Equilibrium (J=L): means there are equal proportions of money injections and leakages
• Disequilibrium (J does not = L): means there are not equal proportions of money injections and leakages

How money injections and leakages affect the economy

• L > J : More withdrawals means a decline in national income
• J > L : More injections, means there is an increase in national income

Types of Markets

• Factor market: where factors of production are traded.
• Goods/Product market: where consumer goods and services are traded.
• Financial Market: provides link between households with businesses with surplus funds
• Foreign market: Foreign currencies are traded

Categories of Gods and Services

• Consumer goods: sugar, electricity, and clothes
• Capital goods: machinery, buildings, vehicles etc.
• Durable goods: furniture, vehicles and computers
• Semi-durable goods: pen, printer cartridge etc
• Non-durable goods: petrol, cool drinks, food

National Accounts Measures

• Gross Domestic Product (GDP): total value of all final goods and services produced within a country's borders in a period of time.
• Gross National Product (GNP): total value of all final goods and services produced by residents of a country, within a period of time.
• Gross National Income (GNI): total value of all income earned by the residents of a country within a period of time.
• Gross Domestic Expenditure (GDE): total value of spending on goods and services within a country in a period of time.
• Gross Value Added (GVA): sum of the value added at each stage in production.
• Gross Domestic Income (GDI): total value of all income earned within the geographical borders in a country.

What the measures do

• GDP reflects the current level of the economy and any economic growth. It uses Production, it reflects the comparison of all production and income.

Business Cycle List

• Business Cycles can be described as consecutive periods of increasing and decreasing of economic activity of a country. .

• Upswing/expansion phase Increase in economic activities and an upward movement along the business cycle. •

• Downswing/ Contraction Decrease in economic activities and a downward movement along the business cycle. •

• Recession Slowdown in the economic activities over time •

• Depression Severe slowdown of economic activities, the economic growth gets close to zero •

• Recovery phase An indication that an increase in economic activities has started •

• Prosperity phase The economy has recovered and is accelerating in terms growth •

• Peak Economic activities are at its highest point. •

• Trough Economic activities are at its lowest point. •

• Boom Latter part of the prosperity phase. •

• Trend line A line indicating the general direction of economic activity over the long term •

• Amplitude The distance between the trend line and the peak and trough • Economic indicator It is an indicator that shows or suggests how an economy is likely to behave • Lagging indicator Confirms economic activity taken place • Leading indicator Before activities peak. • Coincident indicator -Indicators change with the cycle Endogenous factors Forces inside the market causing fluctuating economic activities • Exogenous factorsForces outside that markets causing fluctuating economic activities Keynesian view Stipulate that endogenous reasons cause economic fluctuations. • Interventionist view/ Monetarist view • Stipulate that exogenous reasons cause economic fluctuations.Inappropriate government policies, weather and structural changes in the economy cause business cycles

• The business cycle length from peak to peak or from trough to trough • The period immediately before and through the upper turning point of the cycle called the BOOM • The period immediately before and through the lower turning point called the SLUMP measure business cycles

-Business cycle indicators : leading, lagging, coincident, composite

• Exogenous factors suggest that government should not interfere and endogenous factors suggest that the government should interfere