Economics Introduction

Section 1

Resources and markets

1.1 Foundation of economics

Behavioural assumptions underlying economic analysis

Economics - the social science of studying human behaviour and in particular, the way in which societies choose among the alternative uses of scarce resources to satisfy wants.

The study of how scare resources are of should be allocated.

Microeconomics – the study of individual decision-making by both individuals and firms.

Macroeconomics – the study of economy-wide phenomena resulting from group decision-making in entire markets, as such it deals with the economy as a whole.

What? How? For whom? ...to produce › DOLLAR VOTES

Free Market Model Centrally Planned Model

What? what: households “vote” with money what to buy. what: collective preferences of planners.

How? how: competitive forces --> firms must produce goods/services as efficient as possible. how: planners have to co-ordinate all aspects of productive activity.

For whom? for whom: those who have money. for whom: planner determines rewards for people.

Fundamental concepts

Utility - is defined as want-satisfying power; it is property common to all desired goods and services.

We artificially try to measure units of utility in utils.

It is important to distinguish between total utility and marginal utility. Total utility is the total satisfaction derived from the consumption of a given quantity of a good. Marginal utility is the change in total utility due to a one-unit change in the consumption of the good.

The theory of diminishing marginal utility tells us that the extra utility added by the marginal unit of a good consumed falls.

Profit = Total Revenue - Total Cost › an excess of receipts over spending of a business during any time period

Normal profit – the minimum level of reward required to ensure that existing entrepreneurs are prepared to remain in their present area of production.

Economic profit = normal profit (opportunity cost of capital) + accounting...