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The Economic Problem
Economics is: “the study of how to best
allocate the earth’s limited resources to
satisfy humans’ unlimited wants & needs”
Economic Concepts
Scarcity: there are not enough resources to satisfy all of people’s wants
if something is scarce, it will have a market value – called an economic good
the earth’s resources are finite
humans’ wants and needs are infinite
Free Goods do not have market value because one person using some doesn’t leave less for another (eg. Sea water, sunshine, air)
Economic Study
Economics is a social science - a subject concerned with human behaviour
Theories are difficult to study because:- many things may change simultaneously (economists try to isolate singular events by saying ‘all other things remaining equal’ or ‘ceteris paribas’)- events can not be tested in labs
Economic Study
Economic models are developed to illustrate economic events by isolating individual relationships – these are then used to make forecasts about how one event will affect others in the future
Eg. If prices for chocolate rise, we will buy less chocolate and more crisps
Why Do Economists Disagree?
Different opinions about who should be included in economic statistics
Technical, cultural, & social changes affect behaviour and its interpretation
Views differ on what policies should be carried out to affect the economy in the desired way
Economic Choices
Because of scarcity, economic choices are made at all levels – consumers, firms, gov’ts
Choice involves a trade-off
Economic trade-off’s are measured by Opportunity Cost
Opportunity Cost
Measures the cost of any economic choice in terms of the next best alternative foregone
Eg. The opp. cost of working hard on homework is the party you had to miss
Eg. The opp. cost of the gov’t spending £30B on a new aircraft carrier was the potential benefits to the NHS foregone