1) What is economics about?
Concerned with the production and consumption of goods and services. Split into two main branches; Microeconomics and Macroeconomics.
Macroeconomics is concerned with what a country as a whole produces, (aggregate demand and aggregate supply) and certain connected potential problems, such as unemployment, inflation, balance of payments, deficits etc.
Aggregate demand is too high (total amount of spending in the economy) relative to aggregate supply (total national output of goods and services) inflation and balance of trade deficits are likely to occur.
Inflation = rise in prices, if demands rises, firms likely to rise prices
Balance of trade deficits = excess of imports over imports. Aggregate demand rises people are likely to buy more imports. Linked with inflation consumers likely to buy foreign imported goods and home-produced goods will become uncompetitive.
If aggregate demand is too low relative to aggregate supply:
Recession = output declines so growth is negative. Associated with low-level consumer spending, people spend less shops therefore have unsold stocks. As a result they will buy less from manufacturers, which in turn will cut down on production.
Unemployment – results in cutbacks from production.
Government macroeconomic policy focuses on balancing these – demand-side policy to influence the level of spending or supply-side policy to influence level of production e.g. incentives for firms to innovate.
Microeconomics is concerned with the production and consumption decisions of individual and particular firms and consumers.
What to produce – what range of goods and services should be supplies, and how many of each?
How to produce – what resources should be used in the production of these goods and services? What production techniques should be used? What type of technology should be used??
For whom to produce – who consumes the goods and services produced and in what quantities. How much income does each person receive from the production process?
General, central issue. If there was no scarcity, there would be no economic problems. Society would just carry out producing until all of us have everything we want.
The excess of human wants over what can actually be produced. Because of Scarcity, various choices have to be made between alternatives.
Problem = human wants are unlimited. Although we are richer as a country than we used to be, and richer than many other countries in the world currently, we are not completely satisfied – we want more.
Agents in the economy are constrained by the availability of resources. Resources are limited:
- Labour (human input – workers, both numbers and skills)
Land (natural input – land and raw materials)
- Capital (man-made input e.g. machinery, factories, transport)
Economics examines how scarce resources are allocated amongst the competing claims on their use (what, how and for whom)
How do we assess whether any particular allocation of resources is a good allocation:
Based on efficiency and if distribution is fair/equal.
Generally, Rational agents maximise utility, e.g. consumers maximise utility, firms maximise profits and governments maximise welfare or self-serving e.g. votes, therefore maximizing utility.
Productive efficiency: getting the maximum possible output from a given level of inputs (or producing a given level of output with the fewest possible inputs or at the lowest cost)
Allocative (Pareto) efficiency: where you cannot make one person better without making another worse off.
Efficiency in consumption – expenditures allocated such that individuals get the maximum possible satisfaction from their income.
Efficiency in specialization and trade – everyone does what they are best at and then trades for other goods and services, to achieve the best possible outcomes.
Equity – or fairness. What is the fairest