Introduction

 

Definition of Economics

Economics is the study of how limited resources are allocated.

1. Scarcity is an important part of this definition: There are not enough goods to satisfy everyone’s desires; economics studies how people coordinate their wants and desires to do the best they can given this scarcity.

2. There are two main branches of economics:

   1. Macroeconomics: Looks at the economy as a whole, and focuses on issues such as growth, unemployment, inflation, and business cycles

   2. Microeconomics: Studies how individual economic actors (e.g., firms or households) make choices and are influenced by economic forces.

 

Economic Policy

1. Economic policies are the decisions of government that influence economic events.

2. Economic policy is guided both by objective policy analysis (positive economics) and by subjective beliefs of the policymakers (normative economics).

 

Economic Reasoning

Economic reasoning is decision-making based on analysis of costs and benefits.

1. Marginal costs: The additional costs above sunk costs you will pay for choosing an action

2. Marginal benefits: The benefits you receive from choosing an action

3. Opportunity cost: The cost of the activity you have chosen in terms of the benefits you miss by not having chosen the next-best alternative

4. Economic decision rule: You should take action only if the marginal benefits of the action exceed the marginal costs. Or, the opportunity cost must be less than the benefit you receive from the action you have chosen.

 

Production Possibility Curve

1. The production process takes inputs and uses them to produce outputs. Inputs include land, labor, capital, entrepreneurship, and technology.

2. The production possibility curve measures the maximum combination of two outputs that can be achieved from a given number of inputs. It demonstrates the trade-off among choices, given existing institutions, resources, and technology.