Introduction to Economics

Introduction to Economics

• Economics studies how economic agents make decisions about allocating limited resources to satisfy unlimited wants
• It is a social science involving devising theories and analyzing data to understand economic issues

Microeconomics vs. Macroeconomics

• Microeconomics studies individual decision-making units within markets
• Macroeconomics studies the functioning of the economy as a whole, focusing on aggregate characteristics

Positive vs. Normative Economics

• Positive economics describes and explains economic phenomena with facts and cause-and-effect relationships
• Normative economics expresses value judgments about economic fairness and societal preferences

Central Problem: Scarcity

• Scarcity is the fundamental economic problem where limited resources cannot satisfy society's unlimited wants
• Scarcity necessitates choices among alternatives.

Economic Resources (Factors of Production)

• Capital refers to man-made material/physical resources used in production
• Entrepreneurship is a special human effort that takes responsibility for decision-making in firms
• Land includes all natural resources available
• Labour includes people's skills and abilities used for production

Impact of Scarcity on Economic Agents

• Consumers have limited resources such as time and income
• Producers have limited resources like land, labor, capital, and entrepreneurship
• Governments have limited resources in their budget

Choice and Opportunity Costs

• Scarcity requires economic agents to make choices among available options
• Opportunity cost is the value of the next best alternative foregone when a choice is made

Consumer Choices

• The opportunity cost of choosing one item is the enjoyment that could be derived from reading the book

Producer Choices

• The opportunity cost of utilizing a building space is the amount of rent the firm could have collected by renting it out.

Government Choices

• If the government decides to build a hospital, the opportunity cost is the benefits or value generated by a new school

Production Possibility Curve (PPC)

• The PPC shows the maximum alternative combinations of two goods an economy can produce with fully and efficiently employed resources at a given technology
• Key assumptions for PPC include producing only two goods, and a constant state of technology

PPC and Scarcity

• Outside the PPC is unattainable because the economy cannot produce outside its current PPC if the quantity and quality of resources are fixed and technology is held constant
• Combinations outside the PPC will only be attainable if the PPC shifts out in the future.

PPC and Choice

• Limited resources prevent producing two different combinations of two goods at the same time
• The economy must choose from all the possible combinations, which are attainable to produce.

PPC and Opportunity Costs

• PPC slopes downwards because one good must be given up to obtain more of another good
• PPC is concave due to the increasing opportunity cost from resources not being homogeneous or perfectly transferable

Resource Utilization & Employment

• Producing on the PPC means all resources are fully and efficiently utilized/employed, indicating full employment

Production Inside the PPC

• Producing inside the PPC means some resources are not utilized/employed, which means economic agents are experiencing unemployment or underemployment

Productive Efficiency

• Productive efficiency is achieved when the economy produces the largest possible output from available resources

Allocative Efficiency

• Allocative efficiency is achieved when the economy allocates resources to produce the most wanted combination of goods and services in society

Dynamic Efficiency

• Dynamic efficiency achieved with optimal investments in physical and human resources and technology to achieve productivity to meet what the consumer wants

Economic Growth

• Economic growth occurs when more goods and services are produced

Actual Growth

• Actual growth is the growth in actual output
• This is illustrated by movement of points from inside the PPC to onto the PPC.

Potential Growth

• Potential growth is the increase in potential output
• In addition capacity to produce more goods.

Decision-Making Process of Economic Agents

• Economic agents make decisions aimed at achieving their objectives such as maximizing their own well-being

Rational Decision-Making

• A rational economic agent pursues self-interest by weighing costs and benefits to maximize welfare

Irrationality & Cognitive Bias

• Economic agents are not always rational and can have cognitive biases which influences decision-making

Sunk Cost Fallacy

• Decisions are impacted by fixed costs rather than marginal costs
• E.g. Continuing to gym in pain to avoid wasting membership fee.

Loss Aversion

• Loss aversion is the tendency to prefer avoiding a loss
• This is over making an equivalent or greater gain

Salience Bias

• The tendency to focus on prominent information over equally relevant information

Objectives of Economic Agents

• Consumers aim to maximize satisfaction or utility
• Producers aim to maximize profits
• Governments aim to maximize society's welfare and societal goals

Rational Decision-Making Process

• Weigh expected costs and benefits of each choice, often at the margin
• Implement a solution based on rational decision-making

Intended Consequences

• Intended consequences, being deliberate and purposeful, are performed to achieve its intended outcomes

Unintended Consequences

• May occur due to spillover/side effects, information imperfections, or changing conditions

Reviewing Decisions

• Review decision if intended outcomes aren't achieved, unintended consequences outweigh intended benefits, or there are changes in the environment

Cost & Benefit Analysis (CBA)

• CBA is fundamental for economists, intertwined with the marginalist's principle, which is weighed up when rational choices are being made

Marginal Benefit

• Marginal benefit is the extra revenue gained from another purchase in various perspectives

Marginal Cost

• Marginal cost is the additional cost incurred in various perspectives
• Tradeoff and opportunity cost are not interchangeable.

Marginalist Analysis for Consumers

• To consider another can of drink where the thirst is less is also the extra cost required to purchase the unit

Marginalist Analysis for Producers

• Maximize the output level to be equal to revenue.

Marginalist Analysis for Governments

• Look at the safety required to make rational decisons