Introduction to Economics Chapter 1

Study Notes

Definition: Economics is a social science that examines the efficient allocation of scarce resources to satisfy unlimited human needs/wants.
Key Facts:
- Economics studies scarce resources
- It studies the efficient allocation of resources
- Unlimited human wants exist with limited resources, creating scarcity
Rationales of Economics: The reason for studying economics is the existence of unlimited human wants and limited resources to satisfy them.

Scope: Economics covers various issues with many specializations, including development, industrial, transport, and environmental economics.
Methods: There are different ways to analyze economics. Positive economics analyzes facts and answers "what was?", "what is?", and "what will be?" questions, while normative economics deals with opinions and cannot be proven or rejected with facts.

Inductive Reasoning: A method of reaching correct general statements or theories based on specific facts. It involves developing or deriving theories from empirical observations.
Deductive Reasoning: A method of arriving at particular or specific correct statements from general statements (or theories). It involves testing theory validity by moving from general principles to specific cases.

Economic Growth: Occurs when the total output level increases due to an increase in resources' quantity and/or quality or improvements in technology.

What to Produce?: The allocation of resources, deciding which goods and in what quantities to produce.
How to Produce?: Choosing the production technique – labor-intensive or capital-intensive.
For Whom to Produce?: The distribution of the national product, answering who receives the output.

Economic System: A set of organizational and institutional arrangements to address basic economic questions.
Types:
- Capitalist: Characterized by private ownership of resources, minimal government intervention (free market/laissez-faire), freedom of choice, profit motive, and competition. Shortcomings include inequality and negative externalities.
- Command: A system where the state owns and controls production and distribution. Features include collective ownership and central planning. Shortcomings can include lack of efficiency and limited innovation.
- Mixed: Combines elements of both capitalist and command systems, with both public and private sectors co-existing. Features include co-existence of public and private sectors, economic welfare, economic planning, price mechanism, and economic equality.

Decision-Making Units:
- Households: Make decisions on resource use and product demand.
- Firms: Produce and sell products, deciding on resource use and output.
- Government: Influences markets, provides public goods and services.
Circular Flow Model: A visual representation showing the flow of resources, goods/services, and money throughout the economy among the decision-making units and within the product and factor markets.

Scarcity: The fundamental economic problem where resources are limited in supply to meet unlimited human needs and wants.
Opportunity Cost: The value of the next best alternative that is sacrificed to obtain something.
Resources: Resources are categorized as "free" (easily available at zero cost) and "scarce" (limited in supply, requiring trade-offs). Scarce resources include labor, land, capital, and entrepreneurship.
Production Possibility Frontier (PPF): A curve that shows the various possible combinations of goods and services an economy can produce given its resources and technology. Producing on the PPF line is efficient.

A method for reaching general theories based on specific facts, typically by analyzing numerous cases within a group.

A method of moving from general statements (theory) to specific conclusions (predictions), typically testing the validity of the theory.

The cost per additional unit of output increases as more of a particular good is produced. This is due to the fact that resources are not perfectly adaptable to different uses, and specialization effects reduce an economy's specialization toward different production uses..

Using a table and graph showing alternative production possibilities, calculation of the opportunity cost (in the form of lost output of one good per additional unit of another good) can be illustrated when an economy moves between different production points on the production possibility frontier.