0.1 Introduction: Foundations of Economics

The introduction to this economics course will set you up for the main topics in the course.

Keywords:

Economics as a Social Science: The study of people in society and how they interact with each other

Microeconomics: Economics concerned with and the allocation of resources decided by individuals and groups of individuals (e.g. household, small firms)

Macroeconomics: Economics concerned with large scale organisations such as within economies and between economies. This include factors like trade and national productivity

Economic Growth: The increase in economic value of the produce(goods and services) of an economy over time

Economic Development: Steps taken up by a government to improve the welfare of their society. (e.g. health, education, employment rates etc.)

Sustainable Development: Using resources in a sustainable way without depriving our next generation of the same resources.

Positive Statement: A statement that can be backed with actual facts and figures

Normative Statement: A statement based on a personal opinion of the individual

Ceteris Paribus: The assumption that all other factors are equal

Scarcity: Resources are limited to meet needs and wants

Utility: Usefulness and pleasure received with the consumption of a product

Opportunity Cost: The next best alternative foregone with choice of a good/service

Free Goods: Goods that are not scarce

Economic Goods: Goods to be payed for that are also scarce

Allocate Efficiency:  Allocation of resources in which there is least possible wastage

Productive Efficiency: When all resources are used efficiently. Economy should be on production possibility frontier line.

Capital Goods: Goods produced for another firms for the use of further production

Consumer Goods: Goods produced for the direct use of consumers



Basic Economic Problem

Its obvious that resources are limited, however our wants are infinite. Thus following questions must be asked:

1. What to produce in what quantities
2. How to produce (e,g, whether to use machinery or labor)
3. For whom to produce (e.g. to people who can afford it or to be distributed in a fair manner)



Factors of Production

Land- The land on which the business will operate. The payment of this factor is through rent.
Labor- The workforce used for the production of the good/service. Payment method: Wages
Capital- Initial finance put into a business, and the assets it has. Payment methods: Interests
Enterprise/Management- The owner who took up the risk of starting the firm. Payment methods: Profit



Production Possibility Frontier (PPF)

A curve showing the quantity of goods/service produced by an economy using the resources available

Credit: http://i.investopedia.com/inv/dictionary/terms/ppf.gif

The PPF curve shows the maximum amount of resources available in a country, that a country can use.
A- More of Product A produced than Product B. All resources used
B- Equal amounts of Product A and Product B formed. All resources used.
C- More of Product B produced than Product A. All resources used.
X- Not all resources used
Y- Impossible as not enough resources available. However, graph can be shifted towards A by some improvements (e.g. more efficiency)



Utility

Utility is the satisfaction gained from the consumption of a product. Total utility is the total satisfaction gained from the quality of the good. For example, if John eats 5 ice-creams, the total satisfaction gained from eating all the ice-creams. Marginal utility is the extra satisfaction gained from consuming more quantity of the same product. Mostly, utility decreases as the consumption of the same product increases. For example, more satisfaction would be gained from eating burger for the first time and less satisfaction would be gained from eating the 6th burger in a row.



Economist and Model Building

Economists, like scientists use models to test their theories to see their outcomes.


Circular Flow of Income is also an example of a model which shows how money runs through an economy

Credit: https://upload.wikimedia.org/wikipedia/en/thumb/9/9b/Circular_flow_of_goods_income.svg/713px-Circular_flow_of_goods_income.svg.png

Types of Economies: Planned Economy and Free Economy

Planned  Economy- An economy in which decisions as to what to produce, how to produce and for whom to produce is made by the government. The resources are collectively owned and are allocated by the government. The prices, wages and other factors are also set by the government, theoretically, for the best interest of their people. There are many data analysis that need to take place, thus central planning can be difficult. Examples of Planned Economies are: China, Cuba, North Korea

Free Economy- An economy in which decisions are made by private enterprises and they decide prices based upon demand and supply. These economies work relatively efficiently however there could be cases of shortages and surpluses.

However, in reality many economies are mixed economies and include proportions of both types of economy.

Economic Growth

Economic growth is an increase in the value and amount of goods and service a country produces over time, generally one year. Two allow for inflation, it is given as percentage rise to the previous year , thus being names as real economic growth/real gross domestic product. To allow for population, it is given as real gross product per capita (real GDP).



Economic Development

Economic Development is measure of the well being of an economy.  The indicators of the HDI include education, health and social. It's commonly measured as the Human Development Index (HDI) which includes factors such as: literacy rate, avg. years of schooling and life expectancy. Once all factors are calculated, the HDI value is given as a number between one and zero. 0.8 and 0.9 would be considered as very high development; 0.5 as medium development; numbers below 0.5 as low development.



Sustainable Development

As obvious as it sounds, it literally means that development that meets the current generations needs , without compromising our future generation to meet their needs.