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Introduction of Economics - Coggle Diagram
Introduction of Economics
Positive Economics
It is used to describe, explain, or predict economic events by hypotheses, theories and models
Example: Predict future event - "unemployment will increase next year"
Role of positive economics
The use of hypotheses
An educated guess, usually indicating a cause-and-effect relationship about an event
The use of logic
Method of reasoning where it involves making statement which is true
The ceteris paribus assumptiopn
An assumption that does not say anything happen in real world
The use of empirical evidence
Refer to real-world information, observation and data that we acquire through our senses and experience
-Rely on branch of statistics(econometrics)
Theories in relation to hypothesis
A theory is a general explanation of a set of interrelated events usually based on several hypotheses that have been tested successfully
The use of laws
Describe an event in a concise way. Laws are based on theories and are known to be valid
The use of models
Models are used to illustrate theories and describe connections between variable
The importance of refutation
Refute means to contradict it, disprove or to show it to be false. It is the ideas where it must be possible to refute hypothesis or theory
Understanding the Nature of Economics
the study of economics
microeconomics
macroeconomics
KEY concept
Scarcity
Choice
Efficiency
Equity
Economic Well-Being
Sustainability
Change
Interdependence
Intervention
Problem of scarcity and sustaionability
scarcity
refers to situation in which available resources, or factors of production . are finite, whereas wants are infinite
sustainability
refers to maintaining the ability of the environment and the economy to continue to produce and satisfy the needs and wants into the future.
opportunity cost
vale as the next best alternative that must be given up or sacrificed in order to obtain something
free good = 0 opportunity cost
economic good
Factors of Production (FOP)
land
all natural resources including all agricultural and non-agricultural land, as well as everything that is under and above the land (minerals, oil, water)
labour
physical and mental effort that people contributes to the production of the goods and services
entrepreneurship
-management- special human skill possessed by some people, involving the ability to innovate by developing new ways of doing things, take risks, and seek new opening to run the business. It organises the other three FOP
capital
also known as physical capital - man made FOP used to produce goods and services
physical capital
human capital
skills, abilities and knowledge acquired by people, as well as good level of health which make them more productive
natural capital
environmental capital - extended version of the "land" FOP. everything included in land + natural resources that occur naturally such as air, biodiversity and ozone layer.
financial capital
investment in financial instruments, like stocks, bonds and funds
Understanding the world by the use of model
model
Simplified representation of something in real world. Showing only important aspect of the investigation and ignore other detail
simplified representation
show only important aspect
something in real world
ignore other detail
Production possibilities
Definition:
all combination of maximum amount of 2 goods that can be produced in an economy
given : 1. fixed and unchanging resources and technology
PPC curve
Normative Economic
It is based on beliefs or value judgments about what should happen, about what is good or bad, about what is right or wrong
Example: Policy recommendation about what government should do "The gov should spend more money on building school"
Role of normative economics
Value judgement in policy-making
Identify the important of economic problems that should be addressed and recommend policies to solve
Equity and Equality
Equity which refers to fair while equality is the state of being equal
Basic economic questions
what/how much to produce
how to produce
for whom to produce
how goods and services be distributed among population
How to use their resources in order to produce goods and services
Goods and services can be produced by use of combination of factor of production
what they wish to produce
What quantity should they produce
Resource allocation and output/income distribution
Resource allocation refers to assigning available resources, or FOP and involves answering what/how much to produce and how to produce
Example: if what/how much to produce involves choosing a certain amount of weapons and what particular factors of production and in what quantities
For whom to produce, involves the distribution of output and is concerned with how much output different individuals or groups receive. This question is also concerned with distribution of income, since the amount out output people can get depends on how much they can buy
Alternative ways to answer the economic questions
Economic systems: free market economy, planned economy, mixed economy
Resource ownership: public or private sector
public sector -> government (planned economy)
private sector -> private individuals or groups of individuals (free market economy)
Economic decision making
Private decision markets (consumers, firms, resource owners) - FME
Public decision making - Planned economy
Rationing systems
Free market economy uses price rationing to make resource allocation and output/income distribution decision -> price determined
The planned economy uses non price rationing -> methods that have nothing to do with prices determined
Non price rationing results when there are no markets, or when gov interfere in market, government (central authority)
The mixed economy and mixed market economy
In mixed market economies, public and private sector ownership and decision-making often go together
Government decision making role is not limited to activities falling under its ownership
Example: minimum wage legislation
In mixed market economies, there are both price and non price, but price rationing predominating. Example: when gov in market economies provide national defense, they do not rely on price rationing to determine resource allocation. On contrary: when health care service is free, non-price rationing is used
Non price rationing:
waiting line or waiting period (queue)
Market vs government intervention
In market method, resources are owned by private individuals or groups of individuals
In the command method, resources are owned by government
In practice, commands involve legislation and regulations by government