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SSF1074: MODERN ECONOMICS - Coggle Diagram
SSF1074: MODERN ECONOMICS
Week 1: Ten principles of economics
Principle #1: People Face Trade-offs.
*Even if we are not asked to pay money for something, scarce resources are used up in production and there is an opportunity cost involved.
Principle #2: The Cost of Something Is What You Give Up to Get It.
*The opportunity cost of an item is what you give up to obtain that item.
Eg: You have RM100. The goods you wanted to buy are ranked in the following order: shirt, shoes, calculator, book
Principle #3: Rational People Think at the Margin
*One does this when choosing how much and what to produce, or whether to take a particular job, to work extra hours, or what to consume.
Principle #4: People Respond to Incentives.
*Marginal changes in costs or benefits motivate people to respond.
*The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!
Principle #5: Trade Can Make Everyone Better Off.
People gain from their ability to trade with one another.*
*Trade allows people to specialize in what they do best.
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity. *A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
*Example: If at a certain level of market price, the amount consumers want to buy exceeds the amount that producers want to supply. Through market force, excess demand will be eliminated as price adjusts to a new higher level and rations the good to those willing to pay the new, higher price
Principle #7: Governments Can Sometimes Improve Market Outcomes. *Markets work only if property rights are enforced or protected by law.
*We rely on government to enforce rules and policies to protect the serviWhen the market fails (breaks down) government can intervene to promote efficiency and equity.
ce providers.
*When the market fails (breaks down) government can intervene to promote efficiency and equity.
Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services. *Almost all variations in living standards are explained by differences in countries’ productivities.
*Higher productivity resulting more GDP. It means workers are likely to get better pay rise and more jobs are likely to be created.
Principle #9: Prices Rise When the Government Prints Too Much Money. *Inflation is an increase in the overall level of prices in the economy.
*One cause of inflation is the growth in the quantity of money (demand side).
Principle #10: Society Faces a Short-run Trade-off between Inflation and Unemployment. *Economy in good time, people are doing well- who want a job, they get it. Have income to spend; stimulate economic activity. Prices will push up slowly.
*If economy is over-heat, higher interest rate will be imposed to slow down economic activity. Cost of doing business and borrowing activity will increase. People have less money to spend, demand will fall, prices will stop rising quickly..
What is economics?
Many people hear the word "economics" and think it is all about money.
Economics is not just about money.
Economics often involves topics like wealth, finance, recessions, and banking, leading to the misconception that economics is all about money.
Economics is about weighing different choices or alternatives.
. . . The word economy comes from a Greek word for “one who manages a household.”
Needs versus wants
Human beings, in order to survive need a lot of things. Some of these things are very important for our existence. For example, food, clothing, water, shelter and air. These things can be classified as NEEDS.
Things which are needed by us but they are not important for our survival and we can live without them, such as going on an expensive holiday, iphone 12, are known as WANTS. This list is never ending and is continuously increasing.
Elasticity and Its Applications
*Allows us to analyze supply and demand with greater precision.
*Measure of how much buyers and sellers respond to changes in market conditions
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
