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Definition of Economics

• Microeconomics studies the choices of individuals and businesses, their interactions in markets, and governmental influence.
• Macroeconomics studies the performance of the national and global economies.

Two Big Economic Questions

• Choices determine what goods and services are produced, how they are produced, and for whom.
• Services make up the largest part (two-thirds) of South Africa's production, including retail, wholesale, healthcare, and education.
• Goods represent a small part of the total production in South Africa.
• In 1946, 24% of the South African economy was in agriculture and mining, but today that proportion has decreased to 8%.
• The secondary sector's contribution, including mining, construction, and manufacturing, increased from 14% to 24%.
• Goods and services are produced using productive resources, aka factors of production.
• Factors of production are grouped into land, labor, capital, and entrepreneurship.
• People earn income when they sell the service of production:
  • Land earns rent.
  • Labor earns wages.
  • Capital earns interest.
  • Entrepreneurship earns profit.
• A choice can be considered as being made in your self-interest if you think the choice that you make is the best for you to make.
• A choice is for the benefit of social interest of it leads to an outcome that is the best for society as a whole.
• Questions of social interest can be answered by looking at globalization, the information-age economy, climate change, and economic instability.

The Economic Way of Thinking

• A trade-off involves giving up one thing to get something else.
• Rational choice compares the cost and the benefits of an action and achieves the greatest benefit over the cost for the person making the choice.
• Benefit is the gain or pleasure that something brings, influenced by what a person likes/dislikes and their feelings and preferences.
• The opportunity cost is the highest valued alternative that must the sacrificed to get something.
  • It has two components: things you cannot afford and things you cannot do with your time.
• The benefit arising from an increase in activity is called marginal benefit
• The opportunity cost of an increase in activity is called marginal cost.
• Economists consider human nature as acting in self-interest, predicting choices based on incentives.
• Economists advocate for the vital role that institutions play in influencing people to follow incentives for their own benefit.
• Self-interest can promote social interest where institutions exist.

Economics as Social Science and Policy Tool

• Positive statements.
• Normative statements.
• Unscrambling cause and effect.
• Fallacy of Composition.
• Post Hoc Fallacy.
• All policy questions on which economists gives advice involve a blend of the positive and the normative.
• Economics provides a method for evaluating alternative solutions by comparing marginal benefits and marginal costs, even though economics does not relate the policy goals.

Graphing Data

• A scatter diagram plots one variable's value against another for different values of each.
• Breaks in the axes of a graph indicate jumps from the origin (0) to the first values recorded.
• Breaks in the axes can be used to highlight a relationship, or mislead to make a graph that lies.
• A scatter diagram with a clear relationship between two variables indicates a high correlation.

Graphs Used in Economic Models

• A positive/direct relationship exists between two variables that move in the same direction.
  • A line sloping upwards illustrates this relationship.
• A negative/inverse relationship exists between variables moving in opposite directions.
• Many relationships in economic models have a maximum or minimum.
• Variables that are unrelated implies that what happens to the value of one variable, the other remains constant.

Graphs Used in Economic Models Formulas

• The slope of a relationship is the change in the value of the variable measured on the y-axis divided by the change in the x-axis variable.
• The slope of a straight line is constant everywhere along the line.
• To calculate the slope at a specific point on a curve, draw a straight line that has the same slope as the curve at that point.
• An arc of a curve is a piece of a curve.
• Ceteris Paribus means 'if all other relevant things remain the same.' (often shortened to 'cet par')
• In a laboratory experiment, variables apart from the one scientist is conducting are held constant.
• Economists use the same method to graph a relationship that has more than two variables
• The formula for a linear equation is y = a + bx, where there is a straight-line relationship between x and y.
  • Where the value Y is divided by the value of X.
• The y-axis intersect determines the position of the line on the graph
• When the two variables x and y move in the same direction there is posititive relationship.
  • All positive relationships have a slope that is positive.
• When the twho variables x and y move in opposite directions they have a negative relationship.