Introduction to Economics

Social sciences are a study of study human society and relationships; mainly concerned with discovering general principles to describe how societies function and are organized.
 

Economics is the study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.

When the quantity of output produced by an economy increases over a period of time, there is economic growth.
 

Economic development refers to raising the standard of living and well-being of people, particularly in LDCs. It involves increasing income levels, provision of, and access to, basic goods and services (food & shelter), sanitation, education and health care services and reducing poverty, income inequalities, and unemployment.   

Sustainable development is the development which meets the needs of the present without compromising the ability of future generations to meet their own needs.

Positive statements try to describe and explain how things in the economy work. They describe something, give a theory (an increase in price leads to an increase in quantity produced), or be about a cause-and-effect relationship.
Normative statements are about what ought to be and are subjective about what should happen. This includes: the government should lower unemployment rate.  

Ceteris paribus means ‘other things being equal’. Another way of saying this is that all other things are assumed to be constant or unchanging.

Scarcity is the condition in which available resources are not enough to produce everything that human beings need and want.  

Factors of production

• Land – all natural resources, including all agricultural and non agricultural land, as well as everything that is under or above it, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural resources are also called ‘gifts of nature’. 
Payment: Rent
• Labour – the physical and mental contribution to the production of goods and services.
Payment: Wages, including supplements (bonuses and commissions)
• Capital – a man-made factor that is used in the production process of goods and services. It is also referred to as capital goods or investment good.
Payment: Interest
• Entrepreneurship – a special skill involving the ability to innovate by developing new ways of doing things, to take business risk and to seek new opportunities for opening and running a business. 
Payment: Profit

Choice

Utility is the benefit or satisfaction that consumers derive from consuming a good or service.

Opportunity cost is the value of the next best alternative that must be sacrificed to obtain something else.

Free goods are not scarce, and therefore have zero opportunity costs.

Economic goods are scarce, either because it is a naturally occurring scarce resource (such as oil, gas, gold, coal, forests, lakes), or because it is produced by scarce resources. All economic goods have an opportunity cost greater than zero.

PPC

The production possibility curve represents all combinations of the maximum amounts of two goods that can be produced by an economy, given its resources and technology, where there is full employment of resources and productive efficiency.
For an economy to produce on the PPC, all resources must be fully employed and be used efficiently.

An economy's actual output is always inside the PPC because in the real world all economies have some unemployed resources and some producive inefficiency. The greater these imperfections, the further is the point of production from the PPC.

The condition of scarcity....
...does not allow the economy to produce outside its PPC,
...forces the economy to make a choice about what particular combination of goods it wishes to produce,
...means that choices involve opportunity costs.

Shape of the PPC
Since it is a curve, opportunity costs change as the economy moves from one point on the PPC to another. For one extra unit of good X produced, the quantity of good Y that is sacrificed increases more and more. This is due to the specialization of factors of production. They are not equally suitable for the production of both the goods. If they were suitable, the PPC would be a straight line.


Causes of Shifts of the PPC

• Increase in the quantity of resources, or factors of production, in the economy as more output can be produced.
• Improvement in the quality of factors of production, such as educated labour.
• New and improved technology or methods of production. 

An  outward shift may signify economic growth because there is an increase in the volume of output produced over time, as the economy becomes capable of producing more of both goods. Due to unemployment of resources and productive inefficiency, the actual output remains inside the PPC.

Rationing systems

Basic economic questions....

Resource Allocation
What to produce?
How to produce?
Refers to the assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives.

Distribution of Income
For whom to produce?
Concerns how much income different individuals or groups in the population will recieve.

Mixed economies...

Public sector – parts of the economy that is under government ownership. In centrally planned (command) economies, resources are in this sector.

Private sector – parts of the economy that is under the ownership of private individuals or groups of individuals. In market economies, resources are in this sector.

Rationing is the method used to allocate resources and output/income distribution decisions.

Price rationing is based on prices of goods, services and resources to answer the economic questions.

Non-price rationing is based on methods that have nothing to do with prices as markets do not exist in command economies.

Economies...

The (free) market economy is based on private ownership of resources and decision-making, relies on prices determined by markets and price rationing to allocate resources, and distribute income/output.

Advantages

The Invisible Hand- systematic and automatic coordination of individual decisions

Promotion of productive and allocative efficiency

Pursuit of self-interest promotes economic growth

Limitations

Underproduction of goods which are desirable to consumers (merit goods).

Production of goods which are undesirable to consumers (demerit goods)

Monopolies

Market unable to deal with issues of unemployment, inflation, economic growth and development

No social benefits, such as security, rights, etc.

The command economy is based on public ownership of resources and govt. decision-making, relies on commands and non-price rationing methods to allocate resources, and distribute income/output.

The mixed economy relies on both the public and private ownership of resources and decision-making, and price and non-price rationing.

	Command Economy	Market Economy
Resource ownership	Public sector	Private sector
Decision making	Public sector	Private sector
Rationing system	Non-price	Price

 The transition economy is making the transition from a predominantly centrally planned economy towards a mixed market economy.

Economics for the IB Diploma. Tragakes, Ellie. Cambridge University Press. 2009.