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STUDY UNIT 1 CHAPTER 1 WHAT IS ECONOMICS ALL ABOUT 1. INTRODUCTION - Economics has to do with the srudy of how we use scarce resources to satisfy our unlimited wants. - seeks to describe, explain, analyse and predict phenomena like economic growth, unemployment, inflation, trade between individuals, and countries, prices of goods and services, poverty, wealth, money, interest rates, exchange rates, business cycles. 1.1 Scarcity, choice and opportunity Scarcity (not enough goods/ services to satisfy everyones wants) must not be confused with poverty Wants: human desires for goods and services (biological, spiritual, material, cultural, social) they are unlimited, but the means are scarce Needs: are essential thing we need for survival (food, water, shelter, clothing) Demand: when you have the authority (money) to get a service or good you can demand it, purchasing power 3 types of resources: Natural Human Man-made Opportunity cost is the value of the second choice we did not take. (measuring costs that we have chosen in terms of the alternatives we sacrificed) this is the negative slope of the curve Production possibilities curve (or frontier) It indicates the combination of any two goods or services that are attainable when the community’s resources are fully and efficiently employed. Scarcity: all points outside Production Possibilities Curve Choice: is on the curve Opportunity cost: illustrated by negative slope of the curve 1.2 Economics as a science Economics use systematical patterns to explain what happened, predict what is going to happen. EMPIRICIAL SCIENCE: WE STUDY ACTUAL EXPERIENCES MICROECONOMICS (INDIVIDUAL) Focuses on individual parts, the decisions or functioning of decision makers such as individual consumers etc. are studied. Also includes the study of demand supply and prices of individual goods and services. e.g. households, firms, price formation, changes in prices of a single product, e.g. tomatoes, pencils watches. MACROECONOMICS (GROUPS) Economy as a whole, Large - study economy as a whole e.g. inflation, unemployment, economic growth, imports, exports Study thing as in TOTAL production, ECONOMIC GROWTH things to do with the country as a whole. Positive and normative economics Positive: is a fact Normative: is a opinion(should, ought must) Economic Problem Production factors Natural resources – rent Capital – interest Labour – wages Entrepreneurship – Profit Technology Products Economic goods Free goods Ceteris Paribus- with other things the same or equal or held constant Fallacy of composition- assume that the whole is always equal to the sum of the other parts Blinkered approach (biased thinking)- economy tends to make simplified and biased diagnoses of economic issues Post hoc ergo propter hoc- when 2 events follow each other closely in time, people often assume that the second event is the consequence of the first Correlation and causation- same as post hoc, but correlation does not imply causation LAW OF DEMAND THAT THE QUANTITY DEMANDED WILL INCREASE IF THE PRICE OF THE PRODUCT DECREASES Why do economist disagree? They make different value judgements Not agree on facts Might be biased Hold different views about how economy operates Different time perspectives Levels and rates of change: Consumer price index measures level of price in country , we can calculate the rate of change of the level to determine inflation rate Rate of increase usually expressed as percentage Consumer price index increases from 200 to 220 220 − 200 = 𝑥 100 200 20 = 𝑥 100 200 2000 = 200 = 10