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Introduction to Economics Notes.
Definitions
Economics |
the study of how society manages its scarce (limited) resources. |
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Scarcity |
the limited nature of society's resources. |
Resources Allocation
Economic systems can be viewed as: |
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1. Command/Centrally Planned Economy |
the government makes all the pricing and allocation decisions. |
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2. Market Economy/Laissez-faire Economy (free market) |
prices and allocation decisions are determined by the market forces. |
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3. Mixed Economy |
an economy that uses both market & non-market signals in allocating goods and resources. |
Types of Economics
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1. Microeconomics |
the study of how households and firms make decisions and how they interact in markets. |
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2. Macroeconomics |
the study of economy-wide phenomena (ex. Inflation, unemployment, and economic growth). |
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Economic Statements
1. Positive Statement (positive economics) |
claims that attempt to describe the world as it is; factual. |
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2. Normative Statement (normative economics) |
claims that attempt to prescribe how the world should be; what should be. |
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When economists make normative statements, they act more as policy advisors than as scientists. |
Definitions
Free Good |
a good that is not scarce, and is available without a limit. |
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Economic Surplus |
the difference between the benefit of taking an action minus its cost. |
Production Possibility Frontier
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The Scarcity Principle (no-free-lunch principle)
"Having more of one thing means having less of another thing." |
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- scarcity is not only limited to money. |
Cost-benefit Principle
"action should only be taken if the benefits are greater than the costs." |
Cost-benefit Analysis
a method for assessing the desirability of a project taking into account the costs and benefits involved. |
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- a decision is only taken if the benefits exceeds the cost. |
Opportunity Cost
the cost expressed in terms of the best alternative foregone. |
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Opportunity Cost = Explicit cost + Implicit cost |
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Implicit Costs |
what you give up. |
Explicit Costs |
what you opt for. |
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Opportunity costs are unique to economists, financial accountants only recognise explicit costs. |
Production Possibility Frontier
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