Economy Notes

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CHAPTER 1(INTRODUCTION

1.1DISCIPLINE OF ECONOMICS THEORY

There are two different categories concerning economic behavior, the micro economics and macro economics.

Micro economics
The study of economic behavior of individual making units such as producer, consumer, household, and firms.

Macro economics
The study of economic system as a whole or on the basis of aggregate such as consumer price index, inflation rate, national income and unemployment level.

1.2DEFINITION OF ECONOMICS

Conventional perspective

Definition
A study of how societies make use of scarce resources to fulfill their unlimited wants.

Scarce resources refer to the limited factors of production, which are;Land
Labor
Capital
Entrepreneur

Unlimited wants refer to the behavior of man to maximize satisfaction/utility.

Main focus

Maximization of society’s material welfare.

Consumers maximize satisfaction/utility Producers maximize profits
Owners of resources maximize returns

Conclusion

• Attainment of maximum worldly satisfaction
• Discusses the economic problems as they are (normative) not what they ought to be (positive) • Not concerned with value judgment and spiritual well being • Disregard the influence of religion values on economic activities

1.3ECONOMIC CONCEPTS

I. Scarcity
The excess of human wants over what can actually be produced from the limited resources.

Conventional perspective

Land –Inputs into production that are provided by nature such as raw materials from the surface of earth, mineral and oil deposits. The reward is rent. Labor – All forms of human input, both physical and mental, into current production. The reward is wage. Capital – All inputs into production that have themselves been produced such as factories, machineries, equipments and tools. The reward is interest. Entrepreneur – The person who has the capability to combine all resources into the production of goods and services. The reward is profit.

II. Choice

Since resources are limited, choices must be made. Therefore one must choose the best alternative with the most benefit.

III. Opportunity Cost

When one chose the best alternative, the second best alternative must be forgone. Therefore opportunity cost is measured in terms of the second best alternative forgone.

The Production Possibility Curve can further illustrate these three basic economic concepts.

1.4PRODUCTION POSSIBILITY CURVE (PPC)

Definition
A graph that shows various combinations of goods and services that can be produced using all the resources available.

Assumptions

1. The economy is producing two goods only
2. Resources are fixed
3. State of technology is constant
4. The economy is operating at full employment.

Schedule of PPC

|Combination |Motorcycles |CD players | |A |0 |18 | |B |1 |17 | |C |2 |15 | |D |3 |12 | |E |4 |8 | |F |5 |0 |

Graph of PPC

CD players

(
• Shape of PPC is concave

Motorcycles

• Points along the curve are considered efficient combinations • Points outside the curve are unattainable due to the...
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