Summary Economics chapter 1- 4 summaries

EKN 110

CHAPTER 1 (Note to whoever is using these notes, you going to memorise your
a** off)

Economics:

It is the study of how individuals, business and institutions make social choices to
optimize their level of satisfaction under conditions of scarcity.

The Economic Perspective (economic way of thinking):

 Opportunity cost - The opportunity cost of an activity is the value of the next
best alternative that must be forgone in order to undertake this activity, i.e.
gaining one thing at a loss of another.
 Rational (purposeful) behaviour –
 ‘Rational self-interest’ is an assumption of economics.
 Decisions not free from mistakes or unaffected by emotions or feelings.
 Desire to maximize level of satisfaction (utility).
 Simply means that people make decisions with some desired outcome in
mind.
 Rational consumers - Greatest possible satisfaction (U) with unlimited
wants/needs and certain budget constraints.
 Rational producers - Maximum profit with cost constraints and certain
production techniques.
 Utility (U) - Is the pleasure, happiness or satisfaction obtained from consuming a
good or a service. Concepts of utility: (Economists too lazy to say satisfaction)
 Cardinal (measurable) vs. ordinal (comparative).
 Choose between options to max U.
 Allocation of time, energy and money.
 Marginal analysis: Marginal Benefits and costs.
 Marginal = “extra”, “additional” or “a change in”.

,  Decision to obtain the marginal benefit associated with some specific
option always includes the marginal cost of forgoing something else (i.e.
opportunity costs present).



Theories, principles and models:

 Scientific method - the process used to study, explain, and
analyse economic phenomena.
 Economic principles – useful in analysing economic behaviour and
understanding how the economy operates. Tools for ascertaining cause and
effect (action and outcome): (notice the sad face, I don’t like economics).
 Generalizations - Tendencies of typical or average consumers, workers
or business firms (when buying goods with price rises or falls).
 Other-things-equal assumption (ceteris paribus) – the assumption that
factors other than those under immediate consideration are held constant
for a particular analysis.
 Graphical expression – economic models are expressed graphically.


 Macro and micro economics:
Macroeconomics Microeconomics
 It examines either the economy  It is concerned with individual
as a whole or its basic units such as a person, a
subdivisions or aggregates. household, a firm or an
industry.
Examples: government, households Examples: a sole proprietor and a
and business sectors. single household.


 Positive and normative economics:
Positive economics:
 It focuses on facts and cause and-effect relationships.
 Description, theory development and theory testing.

, Normative economics:

 It incorporates value judgments about what the economy should be like.
 Expressions of support for particular policies.

An individual’s economizing problem:

 Limited income and unlimited wants – limited income received with unlimited
wants to provide utility (U).
 A budget line – It is a schedule or curve that shows various combinations of two
products a producer can purchase with a specific money income.
 Attainable and unattainable combinations – Points that show whether the
consumer can buy or not the specific combination of products. Example:
Quantity of *Y*




Unattainable


Attainable



Quantity of *X*




 Trade-offs: sacrifice quantity of one for the other.
 Opportunity cost always present in budget line.
 If consumer income changes:
 Increases: graph will move up as more good can be purchased.
 Decreases: graph will move down as less goods can be purchased.

, Society’s economizing problem: (Government should be one)

 Scarce resources: society has limited or scarce economic resources.
 Resource categories: (also called factors of production or inputs)
 Land – natural resources used in the production process such as water
resources.
 Labour – physical and mental talents used in producing goods and
services.
 Capital – includes all manufactured aids used in producing consumer
goods and services. Example tools and machinery. The purchase of
capital goods is called an investment.
 Entrepreneurial ability – special human resource who performs several
functions such as:
 Combining resources of land, labour and capital to produce a
good or service.
 Makes strategic business decisions that set the course of an
enterprise.
 Is an innovator i.e. introduces new products, production
techniques and new forms of business organizations.
 Is a risk bearer, has no guarantee of profit. Risks his, associates
and stockholders funds.




Production Possibilities Model:

Shows alternatives and choices society faces. Assume the following:

 Full employment in the type of economy.
 Fixed resources, the quantity and quality of the factors of production remains
fixed.
 Fixed technology, the state of technology is constant.
 Two goods that the economy is producing.