ECONOMICS: THEME 1

AIMS OF ECONOMICS

• Increase economic and social welfare.
• Provide information to help make informed judgements.
• Provide suggestions for how to deal with the fundamental economic problem of a shortage of resources and unlimited wants.
• Look at how different economic models may predict certain outcomes.

DIFFICULTIES IN ECONOMICS

• The lack of complete information
• There are many different variables that are difficult to control.

POSITIVE & NORMATIVE 

A positive statement is based on facts that can be tested as true of false. A normative statement is based on an opinion or a value judgement. People can disagree with these statements.

OPPORTUNITY COST

The value of the next best alternative foregone. Opportunity cost means we have to make decisions about the best use of time, money and resources. Sometimes there are two options that are good, but we need to choose the relatively best option.

TYPES OF GOODS

Public Goods -

• non-rival and non-excludable
• not produced at all in a free market
• e.g: streetlamps

Merit Goods -

• cause positive externalities
• underproduced and underconsumed in the free market
• e.g: education, healthcare

Demerit Goods -

• cause negative externalities
• overproduced and overconsumed in a free market
• e.g: cigarettes, alcohol

Free Goods -

• unlimited
• e.g: sunlight, air

Normal Goods -

• an increase in income leads to an increase in demand for these goods
• most goods are normal goods

Inferior Goods -

• demand for these goods decreases as income increases
• usually substitutes

TYPES OF MARKET

• Free Market
• Command Economy
• Mixed Economy

PRODUCTION POSSIBILITY FRONTIERS

A PPF shows the maximum output that an economy can produce if the economy is maximising the use of its…