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Introduction to economics, PPC, Use in thinking to find diagrams - Coggle…
Introduction to economics
Economics as a social science
economics is a social science because it studies human behaviour in relation to the economy
Based on empirical (past) evidence
Cetris paribus
When other things remain constant
Used to create economic models and changes in the ecoomy whilst excluding other factors that might influence change
Models are a simplified version of reality to understand certain interactions
Microeconomics and macroeconomics
Microeconomics
behaviour of individual markets in the economy
Exp: the stud of the market for electric veichles
Macroeconomics
behaviour of the whle economy at a national level
It involves the study of conomic issues as
economic growth
inflation
equity
Nine central concepts
efficiency
Use resources efficiently to make the best possible use of scarce resources
economic well-being
The level of prosperity and quality standards enjoyed by members of an economy
sustainability
the ability of the present generation to meet its needs without compromising the ability of future generations
interdependence
all economic actors, interact with each other in order to achieve economic goals
equity
the idea of fairness
scarcity
Resources are scarce, not all needs or wants can be satisfied
change
The economic world constantly changes, meaning thet economist must adapt and think acoringly
intervention
Government ivolvement in the workings of markets
choices
economics is a study in choices
oportunity of cost
the value of the best alternative that is given up when a choice is made
Economists study the conseqences of choices
The economic problem
human wants and needs are unlimited, but the resources available to satisfy them are finite (scarcity)
Human wants
People desire to consume goods and services
Human wants are demands in the market, but not necesities
Resources
the factors of production used to produce goods and services
the 4 factors of production
labour
The human work used in the production of goods and services
land
the raw materials used for production
exp: oil, wood, plastic
capital
the machinery and equipement used in the productioin of goods and services
entrepeneurship
the person or people who bring together and manage the factors of production, to make a profit
Scarcity
All resources to produce goods have a limited supply
There is not enough resources for everyone, creating scarcity
there is no limit on human needs
Allocation of resources
The distribution of the factor of production to produce different goods and services
Sustainability
We need to be mindful and think about the resources we leave to the future so they can sustain theselves.
Economic and free goods
Economic
Products produced using scarcee resources
free
some resources in certain cituations are not scarce
Choice
Scarcity and choise
Scarcity forces stakeholders to make choices between alternatives as they can't have everything.
Opportnity cost
the highest value alternative that is foregone when an option is chosen
Represents the value an organisation puts on the choice they have made
Economic systems
How society is organised and governed
Economists consider the allocation of resources by an economic system in 3 questions
How are goods and services produced
Who are the goods and services produced distributed to
What goods and services are produced
Types of economies
Free markets
How are goods and services produced?
Production is done by firms that are owned by an individual to make profit
Who are the goods distributed to?
Goods and services are distributed through the price mechanism, people who are willing to pay a price for a product will get it
What products are produced?
Consumers decide the goods and services that are produced
The market is controlled by the producers and consumers
planned economy
How are goods and services producesd
State managed organisations produce goods and serices in a planned economy
Who are the goods and services prodced distributed to
what goods and services are produced
the government determines what is produced based on what th governmet believes the country's people want
The government controls the market and the goods and services which are being produced
mixed economy
A mixture of a planned and free market, where there is a degree of government intervention
The dependency of a government or on firms varies depending on
the economy
Economic methedology
The aproach economist use to study the subject
Economist must use theories
They cannot be tested like in other sciences
Theories are tested by using empirical evidence
empirical evidenceis evidence which has been gathered by direct observation
Positive and normative economics
Positive economics
Objective statements that can be proven true or false based on empirical evidence.
Examples of poritive economics
‘If interest rates are reduced, economic growth rises
As the price of a personal computer falls, its quantity demanded will increase’
By analysing empirical evidence we generate information that can support or refute a positive statement
In simple terms
Logic and reasoning
Hypotheses, models and theories are central
Cetris paribus is crucial to study economics as it alllows us to focus in specific factors.
Normative economics
Judgements that cannot be proved to be true or false based on empiricla evidence
Examples
professional footballers are paid too much
Healthcare should be provided by the state
Economic thoughts
Adam smith
First economic theory created in the 18th century
He believed in a free and unhindered exchange of goods and services
Ideas
Invisible hand
The believ that the economy would auto correct itself
Based on the fact that consumers were rational
It is driven by consumers and producers seeking to maximise their self-interest
Free trade
Removing certain governmental policies would lead to increase production and wealth
lassaiz-faire
believeing that there should be little to none government interventonwith resource allocation and prduction
19th century economics/classical economic thought
Ideas as marginal utility and say's law arised
Ideas
classical economis (utility)
Prices changed from production involved to satisfaction gained by consumption
Consumers should increase production of goods with higer consumer utility
Asumes consumers are rational
Marginal utility
The adiitional utility/satisfaction gained from an additional consumption of a product
To calculate total utility, the marginal utility of each unit consumed is added together
Say's law
Asumes that supply creates its own demand
It implies that increasing national output is very important
Says governments should focus on production and not as much consumption
Marxism
Karl marx identified that wealth came from worker explotation
Marx argued that capitalism would eventually lead workers to revolt and that periods of exploitation would be followed by revolutions
This means that goverments needed to intervene to restore stability and equality
20th century economic thought
Keynesian revolution
ideas
the limitation of markets
After the great depression he saw that markets could stay in disequilibrium for a long time
role of governments
He believed that governments needed to stimulate the demand by increasing government spending
This would increase the flow of income which would further stimulate demand which would help markets function again
Fiscal policies
Use of government spending and taxation toto influence the economy
he believed t was more important than monetary policy
The change in interest and money supply to influence demand
Monetarist
A school of thought which use monetary policies to influence the economy
resurence in the beliefe in laissez faire markets
government spending reduced
shift to supply side policies
improve the quantity and the quality of the factors of production
21st century
ideas
behavioural economics
Using psycology to understand the economic decisions of people
This can help governments and firms to move people towards better choices
Awereness of interdependencies
moving towqards a circular economy
3 princpiples
reciclate products
regenerate nature
eliminate waste
gives increasing importance to psychology and human behaviour in economic decision-making
Believes that decision making from customers can sometimes be irrational
PPC
Production possibility curve
A model that shows the maximum relative amounts of 2 goods a country can produce with a given abailability of resources
Economic models
An economic model helps s understand how the economy works
A simple way to portray the economic concepts of scarcit and opportunity cost
Oppounity cost and scarcity
Opportunity cost
The graph allows us to see the opportunit cost that is linked by producing a certain product over another
as more resources are allocated to the production of a good, the opportunity cost in terms of the other good foregone increases.
Scarcity
It illustrates how the output of 2 goods is limited by the scarcity of available factors of prodction
Scacity means that producing more of one good on the PPC leads to an opportunity cost
Shape of the PPC
They normally have a concave shape (curved outwards)
Constant cost PPC
When the PPC is a straight line and the opportunity cost remains constant
The reason for the concave cave shape is that resources aren't prfectly adaptable
THe oportunity cost incerases as one good is produced more than the other
production possibility curves and economic efficiency
Productive efficiency
Occurs when all abailable resources are utilised and the are producing the highest possible output
THe PPC allways assumes productive efficiency
Points below the PPC represent places where the production is not at its maximum output
Growth in production possibilities
The PPC graph can be used to illusrate growth in production possibilitiesto show how the economy grows over time
The PPC will move towards the right/ouward
Happens because of
increase in available resources
Existing resources become more productive
Use in thinking to find diagrams