ECONOMICS

INTRODUCTION
Economics is the study of choices people and societies make
to attain their unlimited wants, given their scarce resources
(i.e. to deal with the problem of scarcity)
o About making choices
Scarcity is where unlimited wants exceed the limited
resources available to fulfil those wants.
3 FUNDAMENTAL QUESTIONS
What goods or services will be produced?
o When choosing between alternative options what should
we produce or how much of something should we
produce?
How to produce those goods and services
o In many cases, firms face a trade-off between using
more workers and using more machines
Who will receive those gods and services? / For whom to
produce?
o This largely depends on how income is distributed
LESSONS FROM MICROECONOMICS
1. People face trade-offs: Making decisions require trading off
one goal against another
Clothing vs. holidays
Equity vs. efficiency
Work vs. leisure
Environment vs. income
2. Opportunity cost: Cost of something is what you have to
give up to get
True cost of something
The opportunity cost of any production or
consumption activity is the value of next best
alternative that must be given up to engage in that
activity
Production possibility frontier: A curve showing the
maximum attainable combinations of two products
that may be produced with available resources. (It
can be used to illustrate the concept of opportunity
cost)

A and C efficient and

effective
B is insufficient
D is non-realistic

3. Rational people think at the margin: Decisions are made

comparing cost and benefits at the margin
Optimal Decision: MB = MC
Additional benefit = Additional cost
4. People respond to incentive: Marginal changed to costs
and benefits lead to decisions to choose one alternative over
another.
5. Trade can make everyone better off: Trade allows people
to specialise in what they do best and this lies at the heart of
gains from trade.
6. Markets are usually a good way to organise economics
activity: Adam Smith made the observation that households
and firms interact in markets as if guided by an invisible hand
7. Governments can sometimes improve market
outcomes:
Market failure occurs when the market fails to
allocate resources efficiently
When the market breaks down, government can
intervene to promote efficiency and equity
8. The standard of living depends on a countrys
production: variations in living standards are explained by
differences in countries productivity
More productive less productive
* Absolute advantage: can produce both goods at a lower
absolute cost (fewer resources)
* Comparative advantage: What do I have to give up to get
something? Opportunity cost of producing is lower.