Resources and markets
1.1 Foundation of economics
Behavioural assumptions underlying economic analysis
Economics - the social science of studying human behaviour and in particular, the way in which societies choose among the alternative uses of scarce resources to satisfy wants.
The study of how scare resources are of should be allocated.
Microeconomics – the study of individual decision-making by both individuals and firms.
Macroeconomics – the study of economy-wide phenomena resulting from group decision-making in entire markets, as such it deals with the economy as a whole.
What? How? For whom? ...to produce › DOLLAR VOTES
Free Market Model Centrally Planned ...view middle of the document...
Economic profit = normal profit (opportunity cost of capital) + accounting costs
Supernormal profit – profit above the level usual in an economy. Supernormal profits in an industry are likely to attract entry by new firms. Attainable only by entrepreneurs (at the beginning), oligopolies or monopolies (barriers to entry)
Welfare maximisation – “invisible hand” – self-interest leads to increase social welfare. Planners aim to maximise social welfare, but they are less effective.
Rational economic behaviour of a firm › profit maximisation
Positive - "price of VODKA increased" - objective › how something actually happens
Normative - "profit should be equally distributed", subjective › how economy ought to be
Free good - "AIR" › a good that is not scarce so that it is available for everybody without cost
Public good - "DEFENCE, LAW, DAM, PUBLIC PARK, MONUMENTS" › goods and services which, if they are provided to all, are open to use by all members of the society. As nobody can be excluded from using them, public goods cannot be provided for private profit.
Characteristics of public goods:
- can be used by increasing number of people at no additional cost
- more users do not deprive others of any services of the good
- very difficult to charge people for a public good on the basis of how much they use
Nearly public good (jointly consumed) - "ROAD" › goods provided for all without cost, though not everyone can use it at the same time. Excludability.
Economic good - "BEER" › a good produced from scarce resources having market price
Opportunity cost - The amount of other goods and services which could have been obtained instead of any good.
The highest valued alternative that had to be sacrificed for the option that was chosen.
Factors of production
• Land + natural resources
Production possibility curve
The Production Possibility Frontier (PPF) - shows the maximum combinations of output that the economy can produce using all available resources.
Scarcity of resources: point outside the PPF (point D) unattainable....