Foundation Of Economics

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Foundation of Economics

Economics is a study of rationing systems.


Economics is a social science, which is a study of people in society and how they interact with each other.


All goods and services that have a price are relatively scarce.


Scarcity – people wants and needs are infinite while the resources needed to fulfill them are finite


People have to make choices whenever they purchase goods and service, because people do not have infinite incomes. Need to allocate their limited financial resources and need to choose between alternatives.


Opportunity Cost – the next best alternative foregone when an economic decision is made.


Basic Economic Problem

1.   What should be produced and in what quantities?

2.   How should things be produced?

3.   Who should the things be produced for?


Factors of Production

1.   Land – everything that grows on the land or is found under it, sea, all natural resources. Paid with rent.

2.   Labor – human factor. Workers/employees (contribute physically and mentally through ideas). Paid with wages.

3.   Capital – investment in physical capital (machinery, roads, factories, tools, infrastructure) and human capital (quality of workers, value of the workforce – education, health care). Paid for with interest.

4.   Management (entrepreneurship)


Production Possibilities Curve (PPC/PPF)

Used by economists to show the concept of scarcity, choice, and opportunity cost. Shows the maximum combinations of goods and services that can be produced by an economy in a given time period.


Potential Output – if all the resources in the economy are being used fully and efficiently and the state of technology is fixed


In reality, economies are always producing within the PPC.


It’s a curve because there’s the law of diminishing returns which occurs because the workers who specialize in production of one service isn’t as efficient as the production of another.

Economic growth – when economy increase productivity or the level of resources. Represented by the outward shift of the PPC. (PPC1 to PPC2)


Actual growth – occurs when the economy decides to utilize more resources or decides to use it more efficiently, hence increasing output. (X to Y)



How to shift the PPC Outwards?

·      There are improvements in productivity and efficiency

·      New technology or advances in techniques of production

·      Improvement in quantity and/or quality of factors of production

·      But natural disasters or war can cause the PPC to shift inwards



A measure of usefulness and pleasure. Gives an idea of how much usefulness or pleasure a consumer recives when they consume a product.


Total Utility – total satisfaction gained from consuming a certain quantity of a product.

Marginal Utility – extra utility gained from consuming one more unit of the product. Believed that the marginal utility gained from extra units of a product falls as consumption increase.


Microeconomics is


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