Economics 144
Chapter 1: What economics is about
Goods and bads
- Good: Anything that gives a person utility, or satisfaction
- Utility: The satisfaction one receives from a good
- A good can be tangible (touch it) or intangible (an idea)
- People pay for goods
- Bads: Anything from which a consumer will receive disutility or dissatisfaction
- Disutility: The dissatisfaction one receives from a bad
- People pay to get rid of bads
Resources (factors of production)
Land
- Natural resources
- Unimproved land
- Sometimes just called natural resources
Labour
- All physical and mental talents that people contribute to the production process
Capital
- Produced goods that can be used as inputs for further production
- E.g. factories, machinery, tools
Entrepreneurship
- The talent that some people have to organise the other factors of production in
order to produce goods, seek new business opportunities, and develop new ways of
doing things
Scarcity and a definition of economics
Scarcity: The condition in which our wants are greater than the limited resources available
to satisfy those wants
Economics is the science of scarcity. It is the science of how individuals and societies deal
with the fact that their wants are greater than the limited resources available to satisfy
those wants
,The effects of scarcity
1. Choices
- Because of scarcity people have to make choices about how their resources
are spent
- Because our wants are infinite and our resources are limited, some wants
have to go unsatisfied
2. Need for a rationing device
- A means of deciding who gets what of an available resource and goods
- Money is the current rationing device
3. Scarcity and competition
- If there were enough resources to satisfy everyone’s infinite wants, there
would be no need for competition
Opportunity costs
Opportunity cost: The next most valued alternative forfeited when a choice is made
- E.g. In a choice between a piece of pizza and a soda, the opportunity cost of the pizza
is the soda (next best alternative not chosen)
- Opportunity cost implies that even free goods have a cost – those resources that you
are getting for free could have been sued for something else, and therefore have an
opportunity cost
- The higher the opportunity cost of doing something, the less likely it will be done
Decisions made at the margin
Marginal = one more
Marginal benefit: The benefit gained by consuming one extra unit
Marginal cost: The cost of consuming one extra unit
If MB > MC One extra unit will be purchased
If MB < MC No additional units will be purchased
By comparing MB with MC, decisions are being made at the margin
Efficiency: The point at which MB = MC
Incentives: something that encourages or motivates someone to take action
Exchange: Giving something up for something else
,Economic categories
Positive economics: The study of “what is” in economics
- Deals with cause-effect relationships that can be tested
Normative economics: The study of “what should be” in economics
- Deals with value judgements and opinions that cannot be tested
Microeconomics: Deals with human behaviour and choices as they relate to relatively small
units, an individual, a firm, a single market
Macroeconomics: Deals with human behaviour and choices as they relate to highly
aggregate markets or the entire economy
Chapter 2: The production possibility frontier
PPF: The possible combination of two goods that can be produced in a certain period of
time under the conditions of a given state of technology and fully employed resources
Most PPF’s are curves; they bow outward because of increasing opportunity costs
- Law of increasing opportunity costs: As more of a good is produced, the opportunity
cost of producing that good increases
- Everything within a PPF is attainable, everything outside of it is unattainable
The PPF can illustrate several economic concepts
1. Scarcity: The curve itself indicates this, as everything outside of it is unattainable
2. Choice: Points along the curve indicate that some goods must be sacrificed in order
to gain a number of other goods
3. Opportunity cost: The movement along the curve also indicates opportunity cost, the
goods given up so that others could be bought
4. Production efficiency: Any point on the curve
- The condition where the maximum output is produced with the given
resources and technology
5. Production inefficiency: Any point below the curve
- Condition where less than the maximum output is produced with the given
resources and technology. Implies that more of one good can be produced
without producing less of another
- Occurs when resources are unemployed
6. Unemployed resources: Same as inefficiency, any point below the curve indicates
that not all resources are being used
An increase in economic growth will cause the PPF to shift further away from the origin
,Productive efficiency: The condition where the maximum output is produced with the given
resources and technology
- All points that lie on the PPF are productively efficient
- I.e. getting the most out of what is available
Productive inefficient: The condition where less than the maximum output is produced
with the given resources and technology
- All points below the PPF are productively inefficient
- It implies that more of one good can be produced without producing less of another
(unemployed resources)
Economic growth: The increased productive capabilities of an economy
- Indicated by a shift outward of the PPF
- Economic growth caused by:
- Increase in the quantity of resources
- Allows for a greater quantity of output possible (can produce more of both
goods)
- An advance in technology
- The body of skills and knowledge involved in the use of resources in
production
- An advance in technology commonly increases the ability to produce
more output with a fixed amount of resources OR the ability to produce
the same output with fewer resources
, Chapter 6: Prices and Unemployment
Measuring the price level
Price: A single price, the price of one item
Price level: A weighted average of prices of all goods and services
Price index: A measure of the price level
Consumer price index (CPI): The weighted average of prices of a specific set of goods and
services purchased by a typical household; a widely cited index number for the price level
- Based on a representative group of goods and services, called the market basket
- Incudes:
- Food and beverages
- Housing
- Apparel
- Transport
- Medical care
- Recreation
- Education and communication
- Other goods and services
- All of these categories will have different weightings depending on how important
they are deemed that year
- The content and weight of the components is determined by the income and
expenditure survey
Producer price index (PPI): measures the cost of production of goods (unlike CPI it does not include
services)
- Prices are measured at the point where the goods enter the supply chain for the first
time (includes capital and intermediate)
Base year: The year chosen as a point of reference or basis of comparison for prices in other
years; a benchmark year
- The base year will have a CPI of 100
Calculations:
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
𝑪𝑷𝑰 = ( ) × 100
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝑅1,850,000,500
E.g. 𝐶𝑃𝐼 = (𝑅1,550,000,400 ) × 100 = 119.355
Chapter 1: What economics is about
Goods and bads
- Good: Anything that gives a person utility, or satisfaction
- Utility: The satisfaction one receives from a good
- A good can be tangible (touch it) or intangible (an idea)
- People pay for goods
- Bads: Anything from which a consumer will receive disutility or dissatisfaction
- Disutility: The dissatisfaction one receives from a bad
- People pay to get rid of bads
Resources (factors of production)
Land
- Natural resources
- Unimproved land
- Sometimes just called natural resources
Labour
- All physical and mental talents that people contribute to the production process
Capital
- Produced goods that can be used as inputs for further production
- E.g. factories, machinery, tools
Entrepreneurship
- The talent that some people have to organise the other factors of production in
order to produce goods, seek new business opportunities, and develop new ways of
doing things
Scarcity and a definition of economics
Scarcity: The condition in which our wants are greater than the limited resources available
to satisfy those wants
Economics is the science of scarcity. It is the science of how individuals and societies deal
with the fact that their wants are greater than the limited resources available to satisfy
those wants
,The effects of scarcity
1. Choices
- Because of scarcity people have to make choices about how their resources
are spent
- Because our wants are infinite and our resources are limited, some wants
have to go unsatisfied
2. Need for a rationing device
- A means of deciding who gets what of an available resource and goods
- Money is the current rationing device
3. Scarcity and competition
- If there were enough resources to satisfy everyone’s infinite wants, there
would be no need for competition
Opportunity costs
Opportunity cost: The next most valued alternative forfeited when a choice is made
- E.g. In a choice between a piece of pizza and a soda, the opportunity cost of the pizza
is the soda (next best alternative not chosen)
- Opportunity cost implies that even free goods have a cost – those resources that you
are getting for free could have been sued for something else, and therefore have an
opportunity cost
- The higher the opportunity cost of doing something, the less likely it will be done
Decisions made at the margin
Marginal = one more
Marginal benefit: The benefit gained by consuming one extra unit
Marginal cost: The cost of consuming one extra unit
If MB > MC One extra unit will be purchased
If MB < MC No additional units will be purchased
By comparing MB with MC, decisions are being made at the margin
Efficiency: The point at which MB = MC
Incentives: something that encourages or motivates someone to take action
Exchange: Giving something up for something else
,Economic categories
Positive economics: The study of “what is” in economics
- Deals with cause-effect relationships that can be tested
Normative economics: The study of “what should be” in economics
- Deals with value judgements and opinions that cannot be tested
Microeconomics: Deals with human behaviour and choices as they relate to relatively small
units, an individual, a firm, a single market
Macroeconomics: Deals with human behaviour and choices as they relate to highly
aggregate markets or the entire economy
Chapter 2: The production possibility frontier
PPF: The possible combination of two goods that can be produced in a certain period of
time under the conditions of a given state of technology and fully employed resources
Most PPF’s are curves; they bow outward because of increasing opportunity costs
- Law of increasing opportunity costs: As more of a good is produced, the opportunity
cost of producing that good increases
- Everything within a PPF is attainable, everything outside of it is unattainable
The PPF can illustrate several economic concepts
1. Scarcity: The curve itself indicates this, as everything outside of it is unattainable
2. Choice: Points along the curve indicate that some goods must be sacrificed in order
to gain a number of other goods
3. Opportunity cost: The movement along the curve also indicates opportunity cost, the
goods given up so that others could be bought
4. Production efficiency: Any point on the curve
- The condition where the maximum output is produced with the given
resources and technology
5. Production inefficiency: Any point below the curve
- Condition where less than the maximum output is produced with the given
resources and technology. Implies that more of one good can be produced
without producing less of another
- Occurs when resources are unemployed
6. Unemployed resources: Same as inefficiency, any point below the curve indicates
that not all resources are being used
An increase in economic growth will cause the PPF to shift further away from the origin
,Productive efficiency: The condition where the maximum output is produced with the given
resources and technology
- All points that lie on the PPF are productively efficient
- I.e. getting the most out of what is available
Productive inefficient: The condition where less than the maximum output is produced
with the given resources and technology
- All points below the PPF are productively inefficient
- It implies that more of one good can be produced without producing less of another
(unemployed resources)
Economic growth: The increased productive capabilities of an economy
- Indicated by a shift outward of the PPF
- Economic growth caused by:
- Increase in the quantity of resources
- Allows for a greater quantity of output possible (can produce more of both
goods)
- An advance in technology
- The body of skills and knowledge involved in the use of resources in
production
- An advance in technology commonly increases the ability to produce
more output with a fixed amount of resources OR the ability to produce
the same output with fewer resources
, Chapter 6: Prices and Unemployment
Measuring the price level
Price: A single price, the price of one item
Price level: A weighted average of prices of all goods and services
Price index: A measure of the price level
Consumer price index (CPI): The weighted average of prices of a specific set of goods and
services purchased by a typical household; a widely cited index number for the price level
- Based on a representative group of goods and services, called the market basket
- Incudes:
- Food and beverages
- Housing
- Apparel
- Transport
- Medical care
- Recreation
- Education and communication
- Other goods and services
- All of these categories will have different weightings depending on how important
they are deemed that year
- The content and weight of the components is determined by the income and
expenditure survey
Producer price index (PPI): measures the cost of production of goods (unlike CPI it does not include
services)
- Prices are measured at the point where the goods enter the supply chain for the first
time (includes capital and intermediate)
Base year: The year chosen as a point of reference or basis of comparison for prices in other
years; a benchmark year
- The base year will have a CPI of 100
Calculations:
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
𝑪𝑷𝑰 = ( ) × 100
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝑅1,850,000,500
E.g. 𝐶𝑃𝐼 = (𝑅1,550,000,400 ) × 100 = 119.355
