Economics
Chapter 1: Economics and Economies
1.1 What do economists study?
Money is a tool and economics is more than just the study of money.
It is concerned with the following:
The production of goods and services
The consumption of goods and services
Production = The transformation of inputs into outputs by firms in order to earn profit (or to meet other
objective).
Consumption = The act of using goods and services to satisfy wants. This will normally involve purchasing
the goods and services.
THE P R O B L E M O F S CA R C I T Y
The world can only produce a finite amount of goods and services because the world has a limited
amount of resources. These resources, or factors of production, are of three broad types:
Factors of production (or resources) = The inputs into the production of goods and services: labour, land
and raw materials, and capital.
Human resources: Labour = All forms of human input, both physical and mental, into current
production. Limited by number and skills.
Natural resources: Land and raw materials = Inputs into production that are provided by nature:
e.g. unimproved land and mineral deposits in the ground. Limited by raw materials
Manufactured resources: Capital = All inputs into production that have themselves been
produced: e.g. factories, machines and tools. Limited stock of factories, machines, transportation
and other equipment. Productivity of this capital is limited by the current state of technology.
Scarcity = The excess of human wants over what can actually be produced to fulfil these wants. Because
of scarcity, various choices have to be made between alternatives.
Economics studies anything to do with the process of satisfying human wants.
Wants = the form human needs take as they are shaped by culture and individual personality.
DEMAND A N D S U P P LY
Demand is related to wants.
Supply is related to resources. The amount that firms can supply depends on the resources and
technology available.
Given the problem of scarcity potential demands will exceed potential supplies.
Total spending in the economy should balance total production.
DIVIDING UP THE SUBJECT
Macroeconomics = The branch of economics that studies economic aggregates (grand total): e.g.
the overall level of prices, output and employment in the economy.
Concerned with:
o Aggregate demand = The total level of spending in the economy.
o Aggregate supply = The total amount of output in the economy.
Microeconomics = The branch of economics that studies individual units: e.g. households, firms
and industries. It studies the interrelationships between these units in determining the pattern of
production and distribution of goods and services.
MACROECONOMICS
, The achievement of growth and the full use of resources are not easy. This is demonstrated by periods of
high unemployment and stagnation that have occurred from time to time throughout the world.
Business cycle = cycles where periods of growth alternate with periods of recession, such periods varying
from a few months to a few years.
Macroeconomic problems are closely related to the balance between aggregate demand and aggregate
supply.
If aggregate demand is too high relative to aggregate supply, inflation and trade deficits are likely to
result.
Deficit = the total amount by which money spent is more than money received.
Inflation refers to a general rise in the level of prices throughout the economy.
Rate of inflation = The percentage increase in the level of prices over a 12-month period.
Aggregate demand prices
Balance of trade = Export of goods and services minus imports of goods and services. If exports
exceed imports, there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports,
there is a ‘balance of trade deficit’ (a negative figure).
If inflation is high, we are likely to buy more foreign imports and people abroad are likely to buy
fewer of our exports. If aggregate demand is too low relative to aggregate supply, unemployment
and recession may well result.
Recession = A period where national output falls for six months or more.
Growth becomes negative. Low level of consumer spending.
Unemployment = The number of people who are actively looking for work but are currently
without a job.
If firms are producing less, they will need to employ fewer people.
Demand-side policy = Government policy designed to alter (= change) the level aggregate demand, and
thereby the level of output, employment and prices.
Supply-side policy = Government policy that attempts to alter the level of aggregate supply directly.
MICROECONOMICS
Microeconomics and choice
Three main categories of choice that must be made in any society:
What goods and services are going to be produced and in what quantities?
How are things going to be produced?
For whom are things going to be produced?
What they are, how they are made and who gets to consume them.
Choice and opportunity cost
The production or consumption of one thing involves the sacrifice of alternatives.
Opportunity cost = The cost of any activity measured in terms of the best alternative forgone (not have).
The opportunity cost of buying a textbook is the new pair of jeans that you have had to go without.
What we give up in order to do something is known as its opportunity cost.
Rational choices
Rational choices = Choices that involve weighing up the benefit of any activity against its opportunity
cost.
Involves choosing those items that give you the best value for money.
The same principles apply to firms when deciding what to produce. Only if the revenues earned exceed
the cost entailed. Increases profits.
Marginal costs and benefits
Marginal cost = The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of
an activity.
Chapter 1: Economics and Economies
1.1 What do economists study?
Money is a tool and economics is more than just the study of money.
It is concerned with the following:
The production of goods and services
The consumption of goods and services
Production = The transformation of inputs into outputs by firms in order to earn profit (or to meet other
objective).
Consumption = The act of using goods and services to satisfy wants. This will normally involve purchasing
the goods and services.
THE P R O B L E M O F S CA R C I T Y
The world can only produce a finite amount of goods and services because the world has a limited
amount of resources. These resources, or factors of production, are of three broad types:
Factors of production (or resources) = The inputs into the production of goods and services: labour, land
and raw materials, and capital.
Human resources: Labour = All forms of human input, both physical and mental, into current
production. Limited by number and skills.
Natural resources: Land and raw materials = Inputs into production that are provided by nature:
e.g. unimproved land and mineral deposits in the ground. Limited by raw materials
Manufactured resources: Capital = All inputs into production that have themselves been
produced: e.g. factories, machines and tools. Limited stock of factories, machines, transportation
and other equipment. Productivity of this capital is limited by the current state of technology.
Scarcity = The excess of human wants over what can actually be produced to fulfil these wants. Because
of scarcity, various choices have to be made between alternatives.
Economics studies anything to do with the process of satisfying human wants.
Wants = the form human needs take as they are shaped by culture and individual personality.
DEMAND A N D S U P P LY
Demand is related to wants.
Supply is related to resources. The amount that firms can supply depends on the resources and
technology available.
Given the problem of scarcity potential demands will exceed potential supplies.
Total spending in the economy should balance total production.
DIVIDING UP THE SUBJECT
Macroeconomics = The branch of economics that studies economic aggregates (grand total): e.g.
the overall level of prices, output and employment in the economy.
Concerned with:
o Aggregate demand = The total level of spending in the economy.
o Aggregate supply = The total amount of output in the economy.
Microeconomics = The branch of economics that studies individual units: e.g. households, firms
and industries. It studies the interrelationships between these units in determining the pattern of
production and distribution of goods and services.
MACROECONOMICS
, The achievement of growth and the full use of resources are not easy. This is demonstrated by periods of
high unemployment and stagnation that have occurred from time to time throughout the world.
Business cycle = cycles where periods of growth alternate with periods of recession, such periods varying
from a few months to a few years.
Macroeconomic problems are closely related to the balance between aggregate demand and aggregate
supply.
If aggregate demand is too high relative to aggregate supply, inflation and trade deficits are likely to
result.
Deficit = the total amount by which money spent is more than money received.
Inflation refers to a general rise in the level of prices throughout the economy.
Rate of inflation = The percentage increase in the level of prices over a 12-month period.
Aggregate demand prices
Balance of trade = Export of goods and services minus imports of goods and services. If exports
exceed imports, there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports,
there is a ‘balance of trade deficit’ (a negative figure).
If inflation is high, we are likely to buy more foreign imports and people abroad are likely to buy
fewer of our exports. If aggregate demand is too low relative to aggregate supply, unemployment
and recession may well result.
Recession = A period where national output falls for six months or more.
Growth becomes negative. Low level of consumer spending.
Unemployment = The number of people who are actively looking for work but are currently
without a job.
If firms are producing less, they will need to employ fewer people.
Demand-side policy = Government policy designed to alter (= change) the level aggregate demand, and
thereby the level of output, employment and prices.
Supply-side policy = Government policy that attempts to alter the level of aggregate supply directly.
MICROECONOMICS
Microeconomics and choice
Three main categories of choice that must be made in any society:
What goods and services are going to be produced and in what quantities?
How are things going to be produced?
For whom are things going to be produced?
What they are, how they are made and who gets to consume them.
Choice and opportunity cost
The production or consumption of one thing involves the sacrifice of alternatives.
Opportunity cost = The cost of any activity measured in terms of the best alternative forgone (not have).
The opportunity cost of buying a textbook is the new pair of jeans that you have had to go without.
What we give up in order to do something is known as its opportunity cost.
Rational choices
Rational choices = Choices that involve weighing up the benefit of any activity against its opportunity
cost.
Involves choosing those items that give you the best value for money.
The same principles apply to firms when deciding what to produce. Only if the revenues earned exceed
the cost entailed. Increases profits.
Marginal costs and benefits
Marginal cost = The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of
an activity.
