ECONOMICS

ECONOMICS
CHAPTER 1- INTRODUCTION TO ECONOMICS

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Assumed 3 decision makers- consumers (households) – that sell land, labour, capital & entrepreneurship and firms- that pay rent, wages, interest and profits (rewards for above factors of production ) firms then use the factors to produce G/S in return for payment from consumer. Govt imposes taxes on individuals and (income tax) and firms (corporate tax) to provide infrastructure and other services to community

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Econon’s 2 basic assumptions are – human wants are limitless and the resources available are limited.
Satisfying unlimited wants with limited resources is the basic problem. Apart from free goods- air, sunshine etc

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Needs- food, clothing, shelter, medicine, education, travel. Wants- specific satisfiers of these needs.
The ‘ collector mentality’ is assumed in humans. Eg- ostentatious goods- goods bought for symbolic value- luxury cares, expensive wrist watches etc. firms also create wants in consumers.

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Consumer has to decide how to spend his limited income to max his satisfaction, firms with limited capital to max profits and govt with limited tax revenue to max society’s welfare or votes

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A definition of economics- “it is a study of how individuals and societies chose to employ scarce resources to obtain max benefit” or ‘economise’- make the most of what is available

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But limited/scarce resources (economic goods) can produce only limited qty of goods and satisfy a limited no of wants so large number of wants unsatisfied

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Resources are not just scarce but can be used for alternative uses. What goods to buy,entrep- where to invest limited capital etc

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Opportunity cost/real cost
- cost or value of the next best alternative foregone in making a choice
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Measured not in terms of money paid but amount of alternative commodity that must be given up. Eg1kg grapes given up to buy 1kg apples, value of revenue lost in country X to produce in country Y etc

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For this to arise two conditions must be met- 1. Resources must be scarce (apart from free goods). 2.
Resources must have alternative uses

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Consumer’s budget line/budget constraint/ consumption possibility line shows what he can buy with given income, which is at any point of the line

● A producer also incurs opp. Cost due to limited capital. Eg- transfer resources from A to B to produce more B. so o/c is the reduced output of A, Holding excess inventory has o/c since it is capital tied up, re investing own profits o/c is profitable investments elsewhere etc.
● Production possibility curve/ frontier/ boundary/transformation curve (PPC)- shows what is possible

for an economy to produce if all resources are fully employed
● If PPC is a straight line then equal opp.cost. In an economy, the optimal output depends on the political economic situation and priorities in resource allocation.
● PPC assumptions are
1. Resources of a country are fixed at any given point of time
2. The state of technology of production is given
3. There is full utilization of resources
4. Assumed only 2 goods or (categories) are produced to be rep. in the graph

● Points on ppc are max. output with full resources. Points outside cannot be reached with given resources it is a higher output combination and satisfaction. ( cz of scarcity) Points inside curve is a lower output combination due to underutilized resources.

● Scarcity, choice, opportunity cost( but points inside curve do not involve any o/c) law of diminishing returns are concepts of PPC
● law of diminishing returns/increasing opp.cost
- each additional unit of one unit can be obtained by giving up increasing units of the other. Due to increasing o/c since factors of production are not perfect substitutes. A factor optimal in one may not be so in another.
● Opportunity cost= no of units of y given up
No of units of x acquired

● Right Shifts in PPCdiscovering new productive resources, improved technology improved labour productivity (edu,training, etc)
● PPC shifts inwards
Depletion of natural resources
Damages to infrastructure
Decline in labour productivity

● In a country, wealth is the stock of economic goods(not money). Money available to a country is the foreign exchange reserves since it represents command over another country’s goods.
● Basic economic qs
What to produce(in a free market based on consumer), how to produce( the method that is cheaperlabour intensive or capital intensive), for whom to produce (depends on political system), where to produce( location), when to produce( now or later)
● Economic systems are the broad framework in which those basic qs are answered.
● Capitalist/Free Enterprise economy