Social sciences are academic disciplines that study human society

and social relationships, including anthropology, economics,

Economics as a social science Social sciences political science, psychology, sociology and others.

Microeconomics is a branch of economics that studies the

①behavior of individuals and firms in making decisions
regarding the allocation of scarce resources and ②the
interactions among these individuals and firms.
The essential branches of economics: Microeconomics and
Macroeconomics Macroeconomics is a branch of economics dealing with the
performance, structure, behavior, and decision-making of an
economy as a whole.

Scarcity means that limited resources are insufficient to satisfy

Scarcity unlimited human needs and wants.

Since resources are scarce, it is not possible for all human needs
and wants to be satisfied. This means that choices must be made
about what will be produced and what will be foregone (not
produced and therefore sacrificed).

Choice Economics studies how different decision-makers make choices

between competing alternative options and analyses the present
and future consequences of their choices.
Economics as a subject Efficiency refers to making the best possible use of scarce
resources to avoid resource waste.

Efficiency Allocative efficiency requires that scarce resources are used to

produce the goods and services that mostly satisfy societys
Allocative efficiency needs and wants.

Equity is the idea of being fair or just, which is a normative

concept. This is because ideas of what is fair vary according to
beliefs, value judgements and ideologies.

Equality is the sameness of treatment or outcomes for people or

groups of people in a society, which is a positive concept.
Equity and equality
In economics, the ideas of equity and inequity are usually
identified with equality and inequality and are used mostly in
connection with equality in the distribution of income, wealth
and human opportunity.

Security with respect to income and wealth having a job and

housing
9 key concepts of this course
Economic well-being refers to levels of prosperity, economic The ability to pursue one's goals, work productively and develop
satisfaction and standards of living among the members of a one's potential
Economic well-being society, including The ability to have a satisfactory quality of life, which includes
numerous factors such as health, education, social connections,
environmental quality, personal security

The ability to maintain all of the above over time

Sustainability refers to the use of resources at a pace and in ways

that do not decrease the quantity or destroy the quality of
Sustainability resources available for future generations.

In economic theory, economists very often study change

In economics, we can distinguish between the idea of change:
Change (ii)economic theory and (ii)in real-world situation.
between one situation and another situation that has been
caused by a change in one or more variables.
In the study of real-world phenomena, the world is characterised
by continuous change in the institutional, technological, social,
political and cultural environments in which economic events
occur.

Interdependence refers to the idea that economic decision-

makers interact with and depend on each other. Such
interdependence occurs on all levels from individuals to
communities, from communities to nations and from nations to
Interdependence groups of nations.

In economics, intervention typically refers to government

intervention, meaning that the government becomes involved
Intervention with the workings of markets.

Since resources are scarce, it is not possible for all human needs
and wants to be satisfied. This means that choices must be made
about what will be produced and what will be foregone (not
produced and therefore sacrificed).

The scarcity of resources let choices to be made Economics studies how different decision-makers make choices
between competing alternative options and analyses the present
and future consequences of their choices.

The opportunity cost refers to the value of the next best

alternative that must be sacrificed to obtain something else. It
results from the choices which is forced to be made due to the
The scarcity of resources and chocies let opportunity cost to exist Opportunity cost scarcity of resources.

The fundamental problem of economics: scarcity, A free good is any good that is not scarce, and therefore has a
Free good zero opportunity cost. Free goods are rare.
choice and opportunity cost
An economic good is any good that is scarce and has an
Economic good opportunity cost greater than zero.

Sometimes a good can be a free good in certain situations and

an economic good in others. For example, oxygen is a free good
in the open unpolluted countryside, while it can be a economic
Free and economic goods good in a room with no windows that is crowded with people.

Goods provided by the government, such as the road system,

It is important to distinguish free goods from goods or
resources that are available free of charge to their users. There
are two categories of goods that are available free of charge but
which do have opportunity costs and are therefore economic
goods:
public parks and playgrounds, free education, free health care
services: all these are economic goods produced by scarce
resources and are paid for out of tax revenues
Common poor resources: certain natural resources that are not
owned by anyone, such as clean air, forests, rivers, lakes and
wildlife. These resources are also economic goods because they
are scarce, and are becoming increasingly scarce due to overuse
and depletion.

All economies must make choices on what particular goods and

What/how much to produce services and what quantities of these they wish to produce.
Questions related to resource allocation All economies must make choices on how to use their resources
Three basic economics questions related to two economics How to produce in order to produce goods and services.
fundamental topics
All economies must make choices about how the goods and
Question related to the distribution of income For whom to produce services produced are to be distributed among the population.

Labour includes the physical and mental effort that people

Labour contribute to the production of goods and services.

Land consists of all natural resources, including all agricultural

and non-agricultural land as well as everything that is under or
above the land such as minerals, oil reserves, underground
Land water, forests rivers and lakes.

Capital, also known as physical capital, is a manmade factor of

production (it is itself produced) used to produce goods and
services. Examples of physical capital include machinery, tools,
factories and so on. Physical capital is also referred to as a capital
Capital good or investment good.

Entrepreneurship (management) is a special human skill or ability

to innovate by developing new ways of doing things, to take
business risks and to seek new opportunities for opening and
running a business. Entrepreneurship organises the other three
factors of production and takes on the risks of success or failure
The resources as factors of production
Entrepreneurship of a business

Physical capital is used to produce more goods and services in

the future. As defined above, physical capital is one of the four
factors of production consisting of man-made inputs that
provide a stream of future benefits in the form of the ability to
Physical capital produce greater quantities of output.

Human capital refers to the skills, abilities and knowledge

acquired by people, as well as good levels of health all of which
make them more productive. Human capital provides a stream
of future benefits because it increases the amount of output that
can be produced in the future by people who embody skills,
Human capital education and good health.

Other meanings of the term 'capital': the term capital in the most Natural capital, also known as environmental capital, refers to an
general sense, refers to resources that can produce a future expanded meaning of the factor of production 'land' (defined
stream of benefits. earlier). It includes everything that is included in land, plus
additional natural resources that occur naturally in the
environment such as the air biodiversity, soil quality, the ozone
layer and the global climate. Natural capital provides a stream of
future benefits because it is necessary to humankind ' s ability to
Natural capital live, survive and produce in the future.

Financial capital refers to investments in financial instruments,

like stocks and bonds, or the funds (money) that are used to buy
financial instruments. Financial capital also provides a stream of
future benefits, which take the form of an income for the
Financial capital holders, or owners, of the financial instruments

Resource allocation refers to assigning available resources, or

factors of production to specific uses chosen among many
possible alternatives, and involves answering the what/how
Resource allocation much to produce and how to produce questions.

If too many socially desirable goods or services are being

produced, we say there is an overallocation of resources to the
Assigning the wrong amount of resources to the production of Overallocation of resources production of these.
particular goods and services, resulting in overallocation or
Resource allocation Misallocation of resources underallocation If too few socially desirable goods or services are being
produced, such as education or health care, we say there is an
The fundamental topics of economics: resource Underallocations of resources underallocation of resources to the production of these.
allocation and distribution of output or income
If a decision is made to change the amounts of goods produced,
(three basic economic questions) such as more food and fewer weapons, this involves a
Reallocation of resources reallocation of resources.

The third basic economic question for whom to produce,

involves the distribution of output or income and is concerned
with how much output or income different individuals or
different groups in the population receive.

When the distribution of output or income changes, different

Distribution of output or income social groups now receive more, or less, income and output than
previously, this is referred to as redistribution of output or
Redistribution of output or income income.

This happens because of specialisation of factors of production,

PPC with increasing opportunity costs
which makes them not equally suitable for the production of
different goods and services. The opportunity costs of producing
more goods which the resources are more suited for producig,
are fewer than the opportunity costs of producing more of
another good.

The shape of the production possibilities curve

The PPC as a straight line arise when the factors of production

are equally well suited to the production of both goods, such as
in the case of basketballs and volleyballs. The oppotunity cost of
PPC with constant opportunity costs producing more or less of each goods is constant.

An economys actual output, or the quantity of output actually

produced is always at a point inside the PPC because in the real
world all economies have some unemployment of resources and
some inefficiency in production. The greater the unemployment
or the inefficiency, the further away is the point of production
from the PPC.

The Production Possibilities Curves (PPC)

Summary

In the market method, resources are owned by private

individuals or groups of individuals, and it is mainly consumers
and firms (or businesses) who make economic decisions by
Market method responding to prices that are determined in markets.

In the command method, resources (land and capital in

particular) are owned by the government, which makes
Market versus government intervention economic decisions by commands. In practice, commands
involve legislation and regulations by the government, or in
Unit 1 The Foundation of Economics general any kind of government decision-making that affects the
Command method economy.

Free market economy based on the market approach

Two 'ideal types' of economies
Planned economy based on the command approach

Mixed economy: real-world economies combine markets and

commands in many different ways, resulting in mixed
economies.

In the real world, there has never been an economy that is

entirely a market economy or entirely a command economy.
Three types of economies
Real world economies combine markets and commands in many
different ways, and each country is unique in the ways they
combin them. Economies may lean more toward the command
economy (as in planned economies of communist systems), or
more toward the market economy (as in highly market-oriented
economies). Whatever the case, in the last 40 or so years, there
has been a trend around the world for economies to rely more
and more on the market and less on commands.

The private sector are individuals and groups of individuals,

including consumer (households), firm (businesses) and resource
owners, as well as organisations such as NGOs (non-
governmental organizations and interest groups).

Private sector and public sector The public sector is the the government (whether nationa,
regional or local). The government is also sometimes referred to
as the 'state'.

Private sector when free market economy; public sector when

Resource ownership planned economy

Private sector when free market economy; public sector when

Economic decision-making planned economy
Two 'ideal types' of economies: free market economy and
planned economy
In economics, it refers to the method used to make resource
allocation and output/income distribution decisions. There are
two kinds of rationing systems: price rationing system of free
market economy and non-price rationing system of planned
The free market economy and planned economy are Rationing systems economy.
distinguished from each other on the basis of three criteria:
Price rationing system of free market economy means that all
economic decisions relating to what will be produced, how it will
be produced, and who will receive the output are made on the
basis of prices that have been determined in markets.
Non-price rationing system of planned economy means that all
decisions relating to what/how much will be produced, how it
will be produced, and who will receive the output, are made by
use of methods that have nothing to do with prices determined
in markets. Non-price rationing arises when there are no
markets, or when governments interfere in markets, in which
case the government acts as a central authority and makes
economic decisions by commands.

Summary

Automatic coordination of individual decisions:

the invisible hand of the market

Promotion of efficiency
The key advantages of market economy
The pursuit of self-interest provides incentives that
promote economic growth

The market can fail to provide certain goods that

are socially desirable, or can result in the production
of some goods in smaller quantities than are
socially desirable
The economic systems: free market economy, The market can end up cause certain
planned economy and mixed economy Evaluatig the free market economy activities that are socially undesirable (such as the
polluting activities of many firms)

Large producers/sellers can limit competition,

produce less output at higher cost, and sell
their output at higher prices than are socially
desirable

The market is unable to deal effectively with the

issues of unemployment, inflation, and economic
The key limitations of market economy growth and development

People in vulnerable social groups may receive

very low or no income if they have few or no
resources to sell, or if they are unable to work

The market may result in high and increasing

income and wealth inequalities

The market cannot operate effectively without

a strong institutional and legal framework
that must be established and enforced by the
Evaluating the free maret economy and planned economy government, for example, the institution
of private property and property rights.

It was believed that certain macroeconomics objectives, such as

The key advantages of planned economy
rapid economic growth and development, would be better
served through direct administration and government
planning of economic activities.
For example, one of the important macroeconomics objective,
poverty alleviation can be solved by a more equal distribution of
income on the basis of the government policiees such a
progressive tax system, as well as solved by the direct provision
by the government of important social services (health care,
education) that would be widely distributed throughout the
population.

Highly inefficient use of resources, due to the

extreme technical difficulties involved in central
planning of all economic activities, and its
dependence on very detailed information that
is essential for planning economic activities but
that is not readily available
Evaluating the planned economy
Absence of incentives for producers since they do
not own resources (land and capital) and have
no price system on which they can base their
decisions

Excessive bureaucracy that interferes with

Some difficulties run by centrally planned economies achieving economic objectives effectively

Goods and services produced unlikely to reflect

society’s preferences as planners do not base their
output decisions on what consumers want

Limited variety in the goods and services produced

Limited freedom of choice of all non-governmental

economic decision-makers (consumers, producers)

In mixed market economies, public or private sector ownership

and decision-making often go together. For example, privately
owned firms usually make decisions about what and how they
will produce and sell, while the government makes decisions
about economic activities that fall under its ownership (such as
public health services, public road systems, public parks defence
facilities and many others).

However, the government's decision-making role in the mixed

market economy is not limited to activities falling under its
ownership; it also extends into private sector activities. All mixed
market economies, in fact, have government nvolvement with
the private sector that is either a response to the failure of the
The mixed economy and the mixed market economy
market mechanism to work well, or in response to the demands
of politically powerful interest groups.

Increasingly, mixed economies are becoming mixed market

economies. That is, most economic activity is market-based
based rather than centralised, and price rationing is more
common than non-price rationing.

Other Central Themes in Economics

The social scientific method

Model: Economists build models in order to simplify the

complexities of the real world and highlight the more important
relationships between variables. Many of the relationships
included in models are based on hypotheses that are supported
by empirical data.

The ceteris paribus assumption means that when we study

economic theory, we change only one variable at a time, in order
Modelling in economics to study the variable's effects, on the assumption that all other
variables remain constant and unchanging.

Rational economic decision-making assumption means that

decision-makers (consumers, firms, workers and all resource-
Two important assumptions of economic model-building owner) behave according to their best self-interest, and try to
get more rather than less (more benefits from consumption,
The method of economics
more profit from production, higher wages and more income
from selling labor and other resources, and so on).

A statement about something that is, was, or will be; it may be

true or false; ex "the rate of inflation is 5%" (this may or may not
be true}. Positive statements are used to describe events, and
Positive economics make hypotheses and theories.

A statement about something that ought to be, expressing a

subjective opinion or value judgment; it cannot be true or false;
ex "the rate of inflation is too high" is based on an opinion of
what is "too high'. Normative statements are used to determine
Normative economics the goals of economic policies.

Positive economics and norative economics

The examples of positive and normative economics

The 18th century: Adam Smith and laissez faire
Adam Smith is best known for the idea that the self-interested
behaviour of decision-makers without government intervention
results in competitive markets that give rise to a more efficient
use of resources and greater output thus benefitting society.This
is known as the invisible hand of the market

The concept of utility refers to the satisfaction derived from

consuming something.

Utility theory in classical microeconomics Classical economists developed the philosophy of ethics known
as utilitarianism, referring to the idea that an action is right if it
promotes the most happiness for the largest number of people.

The concept of the margin
The 19th century
Say's law in classical macroeconomics
In the 19th century, the concept of utility was combined with the
concept of marginal, meaning extra or additional, leading
eventually to marginal utility as the basis of a theory of value
that determines prices of goods and services. It forms the basis
of rational consumer behaviour that is used to the present day in
microeconomics.
According to Say's Law, supply creates its own demand, which is
a theory that the economy tends toward full employment in the
absence of any government intervention

Karl Marx developed a theory according to which capitalism

would be eventually replaced by communism because of the
market system's internal contradictions that would lead to its
collapse. While this has not materialised, Marx is still highly
A brief history of economic thought
The Marxist critique of classical economics rgarded for his numerous insights into how capitalism works.

One of the important contributions of John Maynard Keynes is

the idea that an economy left on its own will not necessarily lead
to full employment thus requiring government intervention in
The Keynesian revolution order to ensure that full employment will be achieved.

The emergence of macroeconomic policy

According to the monetarist/new classical schools of thought,

The 20th century
government intervention prevents the economy from reaching a
state of full employment on its own, whereas a free market
economy without the government intervening will tend toward
The monetarist/ new classical counter-revolution full employment.

(i) The contributions of psychology to economics, which offer

alternative ways of understanding how consumers make
decisions. The combinative subject derived from psychology and
economics is called behavioural economics (detailedly explained
in Chapter 2).

(ii) The development of new models regarding sustainability that

The 21th century Novel thinkings in the 21st century include: focus on the close interdependencies between the economy
society and the environment and the concept of a circular
economy.