DP Year 1- Economics

The Economic Problem The economic problem is the problem of having unlimited wants but limited resources with which to satisfy them Economic agents (individuals, households and firms) must continually make choices Their wants are unlimited They face a limited supply of economic resources

Economic Resources Economic resources are the scarce resources that are used to produce economic goods and are called factors of production. These fit into one of four categories Land: any factor of production that is provided by nature Labour: is the human input into production Capital: is any factor of production which is man-made Enterprise/Entrepreneurship: organizes the factors of production

Factors of production can be classified as tangible or intangible resources Tangible Resources: can be seen, touched and held Intangible Resources: lack physical properties, such as knowledge and entrepreneurship There are many areas where these economic resources are used Output: usable product Production: the process by which resources are transformed into useful forms Producers: the people or groups of people, whether private or public, who transform resources into usable products

Economics Defined Economics is the study of how people allocate their limited resources to try to satisfy their unlimited wants. Economics can be divided into two branches Microeconomics: the study of the economic behavior of individual participants (e.g. households and firms) and how the prices of goods and services are determined. Macroeconomics: the study of the economy as a whole and economy-wide issues such as unemployment, inflation and growth.

Fundamental Economic Questions What to produce? How to use limited resources to produce the needed output How to produce? Methods of production and technology For whom to produce? Distribution of economic goods and services

Utility Utility: is a measure of satisfaction that people expect to receive from owning and using an economic good or service. The amount of utility that people obtain from goods and services depends upon their tastes and preferences. People generally get more satisfaction the more of the good they have. The amount of utility obtained from many different goods and services available will determine how any individual allocates their income. The individual will choose to spend his income on those items from which he derives most utility.

Types of Economic Systems Economic Systems: are the ways in which society organizes itself to address the problem of scarcity, the way in which it decides what, how and for whom to produce. There are four methods of resource allocation which make up an economic system. Traditional Economy: resource allocation employs methods handed down through generations. Market Economy: production decisions determined by competitive markets Planned/Command Economy: central authority makes economic production decisions Mixed Economy: a combination of the other types of economies

Methodology in Economics Methodology in Economics: economists attempt to understand the real world and predict events. In order to accomplish this they use the scientific method. The following steps are used to understand economic problems Recognizing the problem or issue Cutting away unnecessary detail by making assumptions Developing a model, or story of the problem or issue Making predictions Testing the model

Economic Models Economic Models: are simplified representations of a real world situation that are used to better understand real-life situations Economic variables may have a direct (positive) relationship, inverse (negative) relation or no relationship (variables are unrelated) In order to focus on the relationship between two variables, economists must make assumptions to simplify the real world Ceteris Paribus: the assumption that all other things are held equal, or constant, except those under study. This is used in economic models where we want to see the effect on one variable of a second variable changing.