Economics, goods, utility, opportunity

cost and PPC

What is economics?
Economics is a science about how wants are satisfied with resources.
Human needs and wants are infinite.
Resources are scarce.
Social science is a field of science studying people in society.
Economics
o Robinson Crusoe Economics is economics without other people or money
o Catalaxy talks about a society with more people, money,
scarcity is the main concept in economics
o If we cannot economize it, it is scarce
Economics is a science studying human behaviour as a relationship between their needs/wants and
limited resources.
Homo oeconomicus:
A fully rational person
knows his options and possibilities
can compare these
can choose between them, so that
o consumer he maximizes utility
o firm it maximizes profit
Positive and normative
Positive economics focuses on statements answerable by yes or no; can be evaluated as true or
false. (The price of beer IS around 30CZK.)
Normative economics focuses on evaluative statements. (The price of beer SHOULD be zero. The
price of beer is TOO HIGH.)
Basic economic problem
We have scarce resources.
What should we produce?
How much?
How should we produce it?
Who should it be produced for?
Which system works better in order to allocate our scarce resources to the ends we have?
Micro and macro
Microeconomics is the study of individual business decisions, individual markets and businesses.
Macroeconomics is the study of large-scale economies, such as national, regional or global
economies.
Economic models
Ceteris paribus all other things will be equal; an economic way of having controlled variables
Not perfect, just trying to represent a phenomenon independently.
Three economic systems
1. FREE MARKET ECONOMY
capitalism, laissez-faire, anarchy, voluntaryism, private enterprise economy
prices determined by demand/supply only
2. PLANNED ECONOMY
socialism, communism, cybersocialism, national socialism
central planning committee, government, planned allocation for prices etc.
3. MIXED ECONOMY
social democracies
most common (in West)
Simple categorization of goods
A good is everything you might want to buy; everything for which there is a supply and demand.
The opposite of a good is a bad.
1. FREE GOODS
are not scarce
i.e. air
2. PRIVATE GOODS
scarce
i.e. clothes, houses
3. PUBLIC GOODS
scarce
Are non-rival and non-excludable.
rival goods: if one person uses it, nobody else can use it at the same time (so
i.e. not pavements)
excludable goods: a person can be forbidden from using a good
i.e. infrastructure
Factors of production
land
labour (L)
o The people
o The labourer owns the labour and sells it to the company for his wage.
capital (K)
o human (the skills and know-how of the person)
o physical (machinery, buildings, vehicles, computing systems,)
o social (networking, contacts,)
o religious (investing into the afterlife)
entrepreneurship
Different technologies are described as different combinations of labour and capital:
T
1
-> 2K + 3L = Q
T
2
-> 2K x 3L = Q
(Q stands for quantity)
Economic growth
Nominal national income the value of all the goods and services produced in an economy in a
given time period (1 yr); can be measured
1. by looking at the value of the output of the goods and services
2. by the expenditure on the goods and services
3. by total incomes of the households for letting the firms use their factors of production
Real national income - The actual quantity of goods and services produced. The standard of living
depends very much on the quantities of goods and services produced. Immeasurable.
Markets
1. OUTPUT (PRODUCT) MARKETS
goods and services are exchanged
2. INPUT MARKETS
resources (labour, capital, land) are exchanged

Physical places (goods and services exchanged for money) X online markets (credit cards or money
transfer)
1. PRODUCT MARKET
goods and services are bought and sold
2. FACTOR MARKET / LABOUR MARKET
the factors of production are bought and sold
3. FINANCIAL MARKET
foreign exchange market, where international currencies are traded
4. STOCK MARKET
shares in companies are bought and sold
Utility
Utility is a measure of pleasure and has no unit. It is perfectly subjective.
1. TOTAL UTILITY
total pleasure from consuming a bundle of sth
2. MARGINAL UTILITY
extra utility gained by consuming a unit of sth
It is rational to buy the highest amount of a good where marginal utility > marginal cost.
Everything, where marginal utility/value > marginal cost is consumer surplus.
Opportunity cost (OC)
The next best alternative forgone
The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which
a choice needs to be made between several mutually exclusive alternatives given limited resources.
Profit is denoted as . It equals the revenue (R) minus the cost.
Economic profit: OC
OC is what you give up to get an opportunity.
Production Possibility Curve / Frontier (PPC/PPF)
(http://cramster-image.s3.amazonaws.com/definitions/economics-14-img-1.png)
It is only possible to produce a certain amount of a good A (butter) while producing a certain amount
of good B (guns). The OC grows for every successive butter/gun.
Growth Development


whole PPC moving outwards
increased resources
o labour force
o change in labour force
participation
o change in labour/leisure decision
improved technology (innovation)
expansion of capital stock
an improvement in the rules (laws,
institutions and policies) of the economy
moving along the curve
decision to produce more of product X


Circular flow diagram










Output
markets
Households
Input
markets
Firms
GOODS

MONEY

Individual demand
1. THE INCOME EFFECT
Consumer buys less at a higher price, because the money he has does not pay for the
original quantity.
2. THE SUBSTITUTION EFFECT
Consumer substitutes good with higher price with a good with lower price.