What is economics? Economics is a science about how wants are satisfied with resources. Human needs and wants are infinite. Resources are scarce. Social science is a field of science studying people in society. Economics o Robinson Crusoe Economics is economics without other people or money o Catalaxy talks about a society with more people, money, scarcity is the main concept in economics o If we cannot economize it, it is scarce Economics is a science studying human behaviour as a relationship between their needs/wants and limited resources. Homo oeconomicus: A fully rational person knows his options and possibilities can compare these can choose between them, so that o consumer he maximizes utility o firm it maximizes profit Positive and normative Positive economics focuses on statements answerable by yes or no; can be evaluated as true or false. (The price of beer IS around 30CZK.) Normative economics focuses on evaluative statements. (The price of beer SHOULD be zero. The price of beer is TOO HIGH.) Basic economic problem We have scarce resources. What should we produce? How much? How should we produce it? Who should it be produced for? Which system works better in order to allocate our scarce resources to the ends we have? Micro and macro Microeconomics is the study of individual business decisions, individual markets and businesses. Macroeconomics is the study of large-scale economies, such as national, regional or global economies. Economic models Ceteris paribus all other things will be equal; an economic way of having controlled variables Not perfect, just trying to represent a phenomenon independently. Three economic systems 1. FREE MARKET ECONOMY capitalism, laissez-faire, anarchy, voluntaryism, private enterprise economy prices determined by demand/supply only 2. PLANNED ECONOMY socialism, communism, cybersocialism, national socialism central planning committee, government, planned allocation for prices etc. 3. MIXED ECONOMY social democracies most common (in West) Simple categorization of goods A good is everything you might want to buy; everything for which there is a supply and demand. The opposite of a good is a bad. 1. FREE GOODS are not scarce i.e. air 2. PRIVATE GOODS scarce i.e. clothes, houses 3. PUBLIC GOODS scarce Are non-rival and non-excludable. rival goods: if one person uses it, nobody else can use it at the same time (so i.e. not pavements) excludable goods: a person can be forbidden from using a good i.e. infrastructure Factors of production land labour (L) o The people o The labourer owns the labour and sells it to the company for his wage. capital (K) o human (the skills and know-how of the person) o physical (machinery, buildings, vehicles, computing systems,) o social (networking, contacts,) o religious (investing into the afterlife) entrepreneurship Different technologies are described as different combinations of labour and capital: T 1 -> 2K + 3L = Q T 2 -> 2K x 3L = Q (Q stands for quantity) Economic growth Nominal national income the value of all the goods and services produced in an economy in a given time period (1 yr); can be measured 1. by looking at the value of the output of the goods and services 2. by the expenditure on the goods and services 3. by total incomes of the households for letting the firms use their factors of production Real national income - The actual quantity of goods and services produced. The standard of living depends very much on the quantities of goods and services produced. Immeasurable. Markets 1. OUTPUT (PRODUCT) MARKETS goods and services are exchanged 2. INPUT MARKETS resources (labour, capital, land) are exchanged
Physical places (goods and services exchanged for money) X online markets (credit cards or money transfer) 1. PRODUCT MARKET goods and services are bought and sold 2. FACTOR MARKET / LABOUR MARKET the factors of production are bought and sold 3. FINANCIAL MARKET foreign exchange market, where international currencies are traded 4. STOCK MARKET shares in companies are bought and sold Utility Utility is a measure of pleasure and has no unit. It is perfectly subjective. 1. TOTAL UTILITY total pleasure from consuming a bundle of sth 2. MARGINAL UTILITY extra utility gained by consuming a unit of sth It is rational to buy the highest amount of a good where marginal utility > marginal cost. Everything, where marginal utility/value > marginal cost is consumer surplus. Opportunity cost (OC) The next best alternative forgone The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Profit is denoted as . It equals the revenue (R) minus the cost. Economic profit: OC OC is what you give up to get an opportunity. Production Possibility Curve / Frontier (PPC/PPF) (http://cramster-image.s3.amazonaws.com/definitions/economics-14-img-1.png) It is only possible to produce a certain amount of a good A (butter) while producing a certain amount of good B (guns). The OC grows for every successive butter/gun. Growth Development
whole PPC moving outwards increased resources o labour force o change in labour force participation o change in labour/leisure decision improved technology (innovation) expansion of capital stock an improvement in the rules (laws, institutions and policies) of the economy moving along the curve decision to produce more of product X
Individual demand 1. THE INCOME EFFECT Consumer buys less at a higher price, because the money he has does not pay for the original quantity. 2. THE SUBSTITUTION EFFECT Consumer substitutes good with higher price with a good with lower price.