Economics Notes

Adam Smith: (1723-1790) is known as the father of modern economics, he is

accredited for writing one of the first and most important books on the subject
called An Inquiry into the nature and causes of the wealth of nations. The book
was written in 1776, which coincidently resides in the period that the world
recalls as the Industrial revolution of Britain, a good explanation for this is that
this was the first time one had experienced industrialization, which had
complicated and, in essence, created modern economics. Smith was known for
his choice of a free market, which involved no government interference between
the customer and his desired product. He preferred the Laissez-faire
management style.
Economics is considered a social science along with other subjects such as
history, psychology and sociology. The main rule of economics is that the earths
resources are finite which means that they are limited. These resources are
utilised to produce goods (tangible) and services (intangible), which results in
these being finite as well. Tangible goods are products that can be physically
acquired for example books and pencils, intangible services are services
provided by humans to others such as insurance or mechanical repairs.
Human needs and wants are infinite, which means that there is no stop to them,
coming in. However since the resources are finite, a problem arises which is
defined simply as the basic economic problem. Needs are basic necessities
which are required to live life and wants are luxury goods which are required by
humans only after they have achieved every basic necessity. The resources being
limited require a proportioning system, which is where economics comes in. It is
a rationing system of organising the finite resources to fulfil the infinite wants
and needs.
To an economist, goods and services provided with a price are reckoned to be
scarce. This means that those goods or services are finite and the requirement
for it is infinite. For example a car could be available at every house around
yours, however that does not mean that everyone in your city or country can
afford one. The price of the car, therefore, is a rationing agent of the car and any
good or service supporting a price tag is known as an economic good.
Choice is a vital component of modern economics because incomes of an average
person today are finite which is why an important decision has to be made every
time they have to purchase a good or service. They have to organise a financial
savings plan for the money to last until the next payday.
Opportunity cost is otherwise known as the next best alternative when an
economic decision is made. If two choices are available for the same price and
one is chosen, then the other product is considered the opportunity cost.



Factors of production
Similar to the ones taught in business studies, Land, Labour, Capital and
Enterprise.
Land is the plot of the business in business studies however in economics it is
quite literally much deeper. It also means the raw materials obtained from under
the land i.e. natural resources like gold, coal, oil and natural gas. Furthermore it
also includes vegetation such as wheat, rice etc. Both renewable and non-
renewable resources are considered when deciding on the land in economics.
Labour is the manpower both physically and mentally contributed towards the
production from the workforce.
Capital is investment in both physical and human capital; physical capital
includes the stock of manufactured resources such as factories, machinery, roads
and tools that are combined to provide goods and services in an economy. On the
other hand human capital is the value of the workforce. Investments such as
education or improved healthcare are considered a significant contributor to the
economic growth.
Management is the organising and risk-taking factor of production; this is where
the aforementioned factors are combined by entrepreneurs to produce goods
and services of their liking. The entrepreneurs look for investment and deploy
personal money to commence producing goods and services and eventually
obtain a significant profit margin. A profit is never guaranteed which therefore
makes this process, or factor, a risk-taking procedure and if no profit is obtained
then the investments both foreign and personal are all conceded to a definite
loss.
Production possibilities curves, these graphs are used to identify the concepts of
scarcity, choice and opportunity cost. A production possibility curve is referred
to; to identify the maximum combination of goods and services an economy can
produce at one specific time. A potential output is when all the resources in the
economy are being used fully and efficiently and the state of the technology is
fixed.
Utility is the amount of satisfaction and pleasure a consumer receives from the
purchase of a product. The two methods of measuring utility are Total Utility
and Marginal Utility. Total utility is the overall satisfaction obtained from
consuming a certain proportion of a product. For example, if a person eats 5 ice
creams, then the total utility would be measuring the total pleasure obtained by
consuming all of those ice creams.
Microeconomics is, as the name suggests, dealings with smaller and discrete
economic agents and their reaction to versatile events. For example it previews
consumers and their point of view on demand & expenditure; (individual firms
and how they make decisions i.e. their choice of product for production and the
amount produced); (individual industries and how they may be affected by such
things as government action).
Macroeconomics utilises a broader point of view and considers things such as
measuring the total economic activity occurring in an economy, inflation,
unemployment, and the distribution of income in the economy.
Economists and model building: Economists tend to build hypothetical models to
test and visualise their opinionated theories, much like other social scientists.
These models can be altered and exploited to comprehend the different
outcomes if one of the elements is changed. Cetris Paribus, which means, all
other things being equal in Latin, basically it is used when economists would
like to know the different outcome if one variable is changed which requires the
others to remain constant. For example if we consider a standard office a
situation, so if economists want to witness how the employees react to a wage
alter, they will assume that the tax percentage will be the same as well as their
expenditure. Assumption is an important part of an economists life.
Rationing Systems: planned economies versus free market economies
Economics is a study of rationing systems, resources within an economy are
relatively scarce which makes economists wonder whether there is a way of
rationing those resources and the goods and services produced by them. The two
main rationing systems are
Planned economies: Also known as a centrally planned economy or command
economy. In this decisions such as what to, how to and who to produce for are
controlled by the government (central body). All the relevant resources are
collectively owned. The government arrange all production, set wages and prices
through central planning. Decisions are made for the peoples best interest. Until
1980, almost 1/3 of the world lived under planned economies including the
USSR and China. Today, due to the dramatic change in Eastern Europe
Free market economies: Also known as private enterprise economy or
capitalism, in this economy prices are used to ration goods and services. All
production is operated by the private hands and the demand and supply are left
free to set wages and prices in the economy. This sort of economy often works
very efficiently and there are very minor cases of a surplus or a shortage.
Economic Growth: National income is the value of all the goods and services
produced in an economy in a given time period, normally one year. It can be
measured by adding up all the activity along any route of the figure 1.3. It is
purely a money measurement and an average, which is why economic growth
does not brief us about much about welfare of the people in a country. For
example a countrys economy could grow due to the militarys armament sector
grows, this however does not indicate whether the average person is better off.
Economic Development: is a measure of welfare, a measure of well-being. It is
usual to measure economic development not just in monetary terms (GDP) but
also in terms of other indicators such as health, education and social. Human
Development Index weighs up real national income per head, adult literacy rate,
the average years of schooling and life expectancy while ranking the countries in
order of development.

Student Workpoint 1.1
1) List of needs
Food
Water
Shelter
Transport
Clothing
Communication device
Footwear
Money (for expenditure)
Internet
Computers
Petrol/Fuel
2) List of Grandparents needs
Food
Water
Shelter
Clothing
Footwear
Wood
Coal
Radio
Money (for expenditure)
The differences include no transport because back in the day people
mostly walked or if had wealth, could afford the luxury of a Bicycle. And
this of course means no need of petrol/fuel. The next difference would be
the lack of Internet and communication device is logical, as they were not
invented in those days. The wood and coal was a requirement as it would
provide the necessary heat for warmth and coal for cooking etc.
3) List of needs: Norway
Food
Water
Shelter
Thick clothing
Skiing equipment
Heater/furnace
Money (for expenditure)
Boots
Communication
The differences here are obviously the thicker apparel and firm footwear due to
the freezing weather conditions in Scandinavia. The skiing equipment is a
necessary form of transport in deep snow conditions.


Student Workpoint 1.5
1) Group HDI
2) Europe 489.0
3)
North America 325.0

Asia 205.1
South America 58.0
Oceania 25.8
2)
Group National Income