♡introduction to economics♡
● introduction:
○ key terms:
■ economics is the study of how people distribute scarce resources for
production and consumption of goods and services to satisfy wants
and needs
■ an economy is the state of a country or region where resources are
allocated for the production, distribution and consumption of goods
and services to satisfy society’s needs and wants
■ economic agents are individuals, institutions or groups of
institutions that contribute to the economic circuit through actions
and decisions
● types:
○ households
○ firms
○ governments
■ the household is a group of people living under the same
roof who share common resources
● this agent is the most basic economic activity, as
they are consumers of goods and services
■ firms are organizations that produce goods and services to
make a profit
■ a government is an agent responsible for providing public
goods and services and regulating businesses
■ central banks are financial institutions that manage a country’s
money supply and interest rates
● they act as lenders of last resort
● branches of economics:
○ branches of economics:
■ micro-economics:
● study of individuals, households and firm behaviors in
making decisions and providing resources within the
economy
○ eg:
■ individual income
■ macro-economics:
● the study of the behavior and performance of an economy
as a whole
○ it relates to the performance of a nation
■ eg:
● inflation
● economic growth
● unemployment
● favorable balance of payment
● scarcity and change:
○ scarcity is when there are insufficient resources to meet all wants
■ opportunity cost:
● opportunity cost is the measure of profit when choosing
one business over another
○ it is the sacrifice of one option for another
■ eg:
● you have $100 and you can either
buy one apple that costs $100 or 2
bananas for $50 each
○ therefore the opportunity cost
of the apple is the 2 bananas
■ similarly, the
opportunity cost of the
2 bananas is the
apple
○ formula of opportunity cost:
■ total revenue — economic profit
● or what one sacrifice minus by what
one gains
● money cost is the actual cash cost incurred in the
production and sale of marketable goods that can result in
cash flow for the business
○ these include:
■ direct material cost:
● raw materials
● packing materials
■ direct labor costs:
● factory workers salary
■ direct overheads:
● factory rent
● plant depreciation
■ indirect materials and labor costs:
● stationery
● office staff salary
■ indirect overheads:
● advertising and marketing
● distribution costs
● administrative costs
● legal costs
■ or any costs that require monetary
settlement
● these may be incurred in cash or
credit to be settled later
● goods:
○ free and economic goods:
■ free goods:
● goods that are not scarce and free of cost
○ eg:
■ air
■ rain
■ sunlight
■ economic goods:
● goods that are scarce in relation to its demand and are
available for a price
○ eg:
■ food
■ clothing
■ education
● economic efficiency:
○ key terms:
■ regions:
● attainable combination:
○ a combination of two goods which is feasible by the
economy to manufacture with the available resource
allocation and technology
● unattainable combination:
○ the combination of two goods which is not possible to
be produced with allocated resources and available
technology
● efficient levels of production:
○ an efficient level of production means that the
economy is utilizing its resources in the best
possible manner to produce goods and services
● inefficient levels of productions:
○ inefficiency occurs when an economy is not
producing goods and services at its maximum
potential output, given its available resources and
technology
● production possibilities frontier:
■ production possibilities frontier (ppf):
● a curve showing the possible combinations of two goods that a
country can produce in a given period, with all their resources fully
and efficiently utilized
● in a production possibility curve (ppc):
○ points that lie on the curve shows
the attainable combination and is efficient in
production
○ points that lie inside the curve shows attainable
combination but it is inefficient in production
○ points outside the curve represents the unattainable
combination of goods
○ assumptions of the pff:
○ there are only 2 types of goods produced
○ resources are fixed (the quantities do not change)
○ technology is fixed or constant
○ resources are used in a technically efficient way
○ resources are fully employed
● shift in the ppf:
○ overtime, the productivity of a nation can increase:
■ movement to the right = growth in
economy
● discovery in natural resources
● technology advancement
● training of the workforce
● expansion of human capital
● competition
■ movement to the left = economy contracts
● migration of labor
● natural disasters
● lack of capital
● social and political problems
● health risk and quality of the labor
force
○ key terms:
■ full employment:
● a situation where all available resources are employed
○ businesses are producing as much as possible with
the resources available
■ constant state of technology:
● it is assumed that the state of technology will be constant
○ with improvements with technology so will production
■ economic efficiency:
● the idea that it is impossible to improve the situation of one
party without imposing a cost on another
○ if a situation is economically inefficient, it becomes
impossible to benefit at least one party without
imposing costs on others
■ peak production efficiency:
● when a company is producing the maximum amount of one
good without wasting resources or lowering the production
level of another good
■ production inefficiency:
● when resources are wasted
○ or when production levels are lower than their
potential
■ marginal rate of transformation (mrt):
● the rate of which we can transform one good into another
○ it shows how much one good is given up to produce
a unit of the other
● rates:
○ increasing opportunity cost:
■ the law of increasing opportunity cost
states that when a company continues raising
production of one good, the opportunity cost
of another good increases
■ if it is raising production of one product, the
opportunity cost of making the next product
rises
● this occurs because the producer
reallocates resources to make that
product
○ using those resources for the
original good was more
profitable for the company
○ constant opportunity cost:
■ occurs when the opportunity cost stays the
same as you increase your production of one
good
● it indicates that the resources are
easily adaptable from the production
of one good to the production of
another good
● decreasing opportunity cost:
■ the law of decreasing opportunity cost states
that a firm’s opportunity cost reduces when
production declines
■ when the cost of producing one
product reduces, the next product
also reduces
● influences on others in making economic decisions:
○ influences on individuals in making economic decisions:
○ the main influences on individuals in making economic decisions
include:
■ price of the good
■ affordability or income
■ characteristics of the good
● quality
● quantity
● durability
○ availability of the good
○ personal factors:
■ age
■ occupation
■ economic status
■ gender
○ social factors:
■ race
■ religion
■ culture
○ influences on producers in making economic decisions:
■ the main influences on producers in making economic decisions
include:
● price
● economic climate
● consumer tastes
● world events
● government
● availability of resources
● location
○ influences on government in making economic decisions:
■ the main influences on government in making economic decisions
include:
● households
● firms
○ government decisions are impacted by households’
consumption behavior as well as firms’ production
patterns
