Economics: Understanding Scarcity and Choices

Study Notes

Economics examines how individuals, businesses, and societies allocate scarce resources to satisfy unlimited wants.

Economics combines elements of both science and art.
Emphasizing the scientific nature, Lionel Robbins defined economics as the study of human behavior under scarcity. It uses systematic inquiry to analyze economic phenomena.
As an art, economics involves the application of economic principles and theories to solve real-world problems. Alfred Marshall viewed economics as a practical application of scientific knowledge.

Economics branches into two main areas: microeconomics and macroeconomics.
Microeconomics focuses on individual decisions and the behavior of specific entities in the economy:
- Consumers: How individuals make choices, their demands for goods and services, and their responses to price changes.
- Firms: How businesses operate, manage production costs, and allocate resources.
- Markets: How supply and demand interact to determine prices for goods and services.
Macroeconomics looks at the economy as a whole, examining:
- National Income: Factors influencing the overall production and income of a country.
- Inflation: The overall level of prices.
- Unemployment: Factors influencing the number of people without jobs.
- Economic Growth: Factors impacting the overall growth of an economy.

Microeconomics explores how individual consumers and firms make decisions in the face of scarcity.
It examines factors influencing consumer behavior, including:
- Demand for goods and services: Why people buy what they do at different prices.
- Value: How individuals perceive the worth of goods and services.
- Financial decisions: How individuals manage money, save, invest, and borrow.
- Uncertainty and risk: How individuals handle situations where outcomes are uncertain.
Microeconomics also analyzes how firms operate, including:
- Production costs: Expenses associated with creating goods and services.
- Labor allocation: How firms decide to hire workers.
- Business organization: Different structures of firms, from sole proprietorships to large corporations.

A core concept within microeconomics is price theory, which examines how prices are determined in markets.
Prices are set based on the interplay of supply and demand.
Producers consider costs of production, while consumers consider their willingness to pay.
Prices signal information about the relative scarcity of goods and services, guiding individuals and firms in their decisions.