Introduction to Economics

Introduction to Economics

• Economics is the study of how societies allocate scarce resources to satisfy unlimited wants and needs.
• It focuses on the production, distribution, and consumption of goods and services.
• Microeconomics analyzes individual markets and decisions, while macroeconomics examines the economy as a whole.

Basic Economic Concepts

• Scarcity: Resources are limited, while wants are unlimited, leading to choices.
• Choice: Individuals and societies must choose how to use scarce resources efficiently.
• Opportunity Cost: The value of the next best alternative foregone when making a choice.
• Factors of Production: Land, labor, capital, and entrepreneurship are vital inputs for producing goods and services.
• Production Possibilities Frontier (PPF): Illustrates the maximum output combinations of two goods or services given available resources and technology.
• Economic Systems: Different systems (e.g., capitalist, socialist, mixed) handle resource allocation and economic activity in various ways.
• Demand: The quantity of a good or service that consumers are willing and able to buy at different prices.
• Supply: The quantity of a good or service that producers are willing and able to sell at different prices.
• Market Equilibrium: The point where supply and demand intersect, determining market price and quantity.

Market Structures

• Perfect Competition: Many buyers and sellers, homogeneous products, free entry and exit, price takers.
• Monopoly: One seller, unique product, barriers to entry, price maker.
• Monopolistic Competition: Many sellers, differentiated products, relatively easy entry and exit.
• Oligopoly: Few sellers, interdependence among firms, significant barriers to entry.

National Income and Related Aggregates

• Gross Domestic Product (GDP): The market value of all final goods and services produced within a country in a given period.
• Gross National Product (GNP): The market value of all final goods and services produced by the residents of a country in a given period, regardless of where they are produced.
• National Income: Total factor income earned by the residents of a country in a given period.
• Per Capita Income: Measures the average income of a country's citizens.
• Circular Flow of Income: Shows the flow of money and resources between households and firms in an economy.

Money and Banking

• Money: Anything generally accepted as a medium of exchange, a store of value, and a unit of account.
• Functions of Money: Medium of exchange, unit of account, store of value.
• Central Bank: The institution responsible for controlling the money supply and ensuring the stability of the financial system.
• Commercial Banks: Financial intermediaries that accept deposits, make loans, and facilitate payments.
• Inflation: A sustained increase in the general price level of goods and services in an economy.
• Deflation: A sustained decrease in the general price level of goods and services in an economy.

Government Role in the Economy

• Fiscal Policy: Government's use of taxation and spending to influence the economy.
• Monetary Policy: Central bank's use of interest rates and money supply to influence the economy.
• Public Goods: Goods and services that are non-excludable and non-rivalrous, often provided by the government.
• Externalities: Costs or benefits imposed on third parties by the production or consumption of a good or service.
• Market Failures: Situations where markets fail to allocate resources efficiently, leading to government intervention.

International Trade

• Balance of Trade: Difference between a country's exports and imports.
• Trade Deficit: Imports exceed exports.
• Trade Surplus: Exports exceed imports.
• Comparative Advantage: Ability of a country to produce a good or service at a lower opportunity cost than another country.
• Absolute Advantage: Ability of a country to produce a good or service using fewer resources than another country.

Development Economics

• Economic Development: Process of improving the economic well-being and living standards of a country's people.
• Indicators of Development: GDP per capita, life expectancy, literacy rates, poverty rates.
• Growth vs. Development: Growth focuses on increasing production, while development encompasses improvements in living standards and human capital.

Other Important Concepts

• Economic Growth: An increase in the productive capacity of an economy over time, measured by increases in real GDP.
• Economic Underdevelopment: A situation where a country has low income per capita, limited human capital, and poor infrastructure.
• Unemployment: The situation where a person who is actively seeking work cannot find employment.
• Types of Unemployment: Cyclical, frictional, structural, seasonal.
• Poverty: The state of lacking basic necessities of life.