Principle of microeconomics Chapter 1 to 11 summary (MPME511) MID YEAR EXAM SOL PLAATJE

Introduction to Economics: Study Notes Organized, concise, and visually appealing notes for effective learning 1 What is Economics? • Definition: The study of how scarce resources are used to satisfy human wants. • Multiple Perspectives: – George Leland Bach: Study of how scarce resources satisfy human wants. – Michael Parkin: Social science studying choices by individuals, governments, and societies under scarcity. – Interaction of people with each other and their natural surroundings over time. • Key Characteristic: Economics is a social science focused on human behavior and resource allocation. 2 Key Questions in Economics • Why do petrol prices fluctuate? What determines them? • How do petrol price changes impact economic agents (e.g., consumers, businesses)? • What is money, and how is it created? • How does money supply affect the economy? • What is unemployment? What causes it, and what government measures address it? • What are South Africa’s economic prospects and growth potential? 3 Scarcity, Choice, and Opportunity Cost • Wants vs. Needs: Wants are desires; needs are essentials for survival. • Demand: Wants backed by purchasing power. • Resources: Limited in supply (e.g., land, labor, capital). • TANSTAAFL: ”There Ain’t No Such Thing As A Free Lunch” – everything has a cost. • Scarcity: Resources are insufficient to meet all wants. • Choice: Decisions made due to scarcity. • Opportunity Cost: Value of the next best alternative forgone due to a choice. 4 Production Possibilities Curve (PPC) • Definition: Graph showing maximum combinations of two goods with full resource use. • Purpose: Illustrates scarcity, choice, and opportunity cost. • Key Points: 1 – On the curve: Attainable and efficient. – Inside the curve: Attainable but inefficient. – Beyond the curve: Unattainable with current resources. 5 Applications of the PPC 5.1 Goods and Services Classification • Consumer Goods: Non-durable (e.g., food), semi-durable (e.g., clothing), durable (e.g., cars). • Capital Goods: Used to produce other goods (e.g., machinery). • Services: Intangible products (e.g., education, healthcare). • Final vs. Intermediate Goods: Final goods for end-use; intermediate for further production. • Private vs. Public Goods: Private (exclusive use); public (non-exclusive, e.g., roads). • Economic vs. Free Goods: Economic goods are scarce; free goods are abundant. • Homogeneous vs. Heterogeneous Goods: Identical vs. differentiated products. 5.2 Economic Growth • Outward Shift of PPC: Indicates economic growth. • Causes of Growth: – Increase in resources. – Improved technology. – Higher productivity. • Inward Shift of PPC: Indicates economic decline. • Causes of Decline: – Resource destruction. – Deterioration of techniques. – Decreased productivity. 5.3 Resource Allocation • Deciding what and how much to produce. • Allocating scarce resources among competing alternatives. 6 Economics as a Social Science • Purpose of Economic Theory: – Explanation of economic phenomena. 2 – Prediction of future trends. – Policy formulation for decision-making. • Experimental Economics: Uses real-world data and experiments to test theories. 7 Microeconomics vs. Macroeconomics • Microeconomics: – Focuses on individual parts (e.g., consumers, firms). – Describes and explains specific economic phenomena. – Deals with ”what is” (positive economics). • Macroeconomics: – Focuses on the economy as a whole (e.g., GDP, inflation). 8 Positive vs. Normative Economics • Positive Economics: – Objective, fact-based statements. – Describes ”what is” (e.g., ”Inflation is 5%”). • Normative Economics: – Subjective, value-based judgments. – Describes ”what ought to be” (e.g., ”Inflation should be lower”). • Disagreements Among Economists: Arise from differing values, facts, biases, or perspectives. 9 Points to Note in Economics • Economic Way of Thinking: Analytical approach to decision-making. • Common Fallacies: – Biases in judgment. – Post hoc reasoning (assuming cause from sequence). – Correlation vs. causation errors. • Key Concepts: – Wants, needs, resources, scarcity, choice, opportunity cost. – Production possibilities, potential output, economic growth. – Types of goods and services. – Resource allocation. 3 – Social science characteristics. • Common Mistakes: Misinterpreting data, ignoring opportunity costs, or oversimplifying complex issues. For further study, review key concepts and practice applying the PPC to real-world scenarios. Visit xAI Grok for additional resources. 4 Chapter 2: Economic Systems Study Notes for Economics for South African Students (6th Edition) 1 Different Economic Systems • Three Central Economic Questions: – What to produce?: Which goods/services to produce. – How to produce?: Methods and resources used. – For whom to produce?: Who receives the output. – Additional: Where to produce?: Geographical allocation. • Classification Criteria: – Property Rights: Who owns factors of production. – Coordinating Mechanisms: How decisions are made. • Broad Classifications: – Market capitalism. – Planned socialism. – Market socialism. 2 The Traditional System • Definition: Goods/services produced and distributed based on tradition, consistent across generations. • Property Rights: Determined by tradition (e.g., communal or family ownership). • Coordinating Mechanism: All decisions guided by customs and traditions. 3 The Command System • Definition: Central authority directs what, how, and for whom to produce. • Property Rights: State owns all goods, services, and factors of production (except labor). • Coordinating Mechanism: Central authority makes all decisions. 4 The Market System • Definition: Minimal government intervention; decisions result from buyer-seller interactions via market prices. • Property Rights: Private ownership of factors of production. • Coordinating Mechanism: Voluntary exchanges reflected in market prices. • Characteristics: 1 – Incentives: Profit motives drive production. – Competition: Firms compete for consumers. – Negotiation: Buyers and sellers bargain. – Market Capitalism: Private enterprise dominance. – Market Prices: Signal demand and supply. • Functions of Price: – Rationing: Allocates scarce resources. – Allocative: Directs resources to high-demand areas. • Role of Money: Facilitates exchange, replaces barter. 5 The Mixed Economy • Definition: Combines elements of traditional, command, and market systems; one mechanism usually dominates. • Property Rights: Mix of private and public ownership. • Coordinating Mechanism: Decisions by market and/or state. 6 South Africa’s Mixed Economy • Features: – Imperfect Competition: Some markets dominated by few firms. – Nationalization: State ownership of key industries. – Perfect Competition: Rare, idealized market structure. – Privatization: Transfer of state assets to private sector. 7 The Men Behind the Systems • Adam Smith (1723–1790): – Advocated free-market economy and division of labor. – Wealth of Nations: Introduced “invisible hand” concept. • Karl Marx (1818–1883): – Critiqued capitalism; advocated planned socialism. – Communist Manifesto, Das Kapital: Class struggle and labor theory. • John Maynard Keynes (1883–1946): – Emphasized government intervention to stabilize economies. – General Theory: Foundation for macroeconomics and mixed economies. 2 7.1 Comparison of Economic Systems Feature Traditional Command Market Mixed Property Rights Tradition-based State-owned Private Private and public Coordination Tradition Central authority Market prices Market and state DecisionMaking Customs State directives Buyer-seller interaction Combination Example Subsistence communities Former USSR USA (idealized) South Africa 8 Important Concepts • Tradition, command, market, mixed economy, economic system. • Property rights, coordinating mechanism, market prices. • Incentives, competition, negotiation, capitalism, socialism. • Division of labor, money, barter system. • Privatization, nationalization, perfect/imperfect competition. Review Boxes 2-1 to 2-6 for deeper insights. Visit xAI Grok for additional resources.