Economics is the study of how society decides what, how
and for whom to produce.
A resource is scarce if the demand at
a zero price would exceed the available supply.
The income distribution (in a country or in the world)
tells us how total income is divided between diff erent groups or individuals.
The law of diminishing returns says each extra worker
adds less to output than the previous extra worker added.
The production possibility frontier (PPF) shows, for each
output of one good, the maximum amount of the other good that can be produced.
The opportunity cost of a good is the quantity of other
goods that must be sacrifi ced to get another unit of that good.
Production effciency means more output of one good can
be obtained only by sacrifi cing output of other.
A market is a process by which households’ decisions
about consumption of alternative goods, firms’ decisions about what
and how to produce and workers’ decisions about how much and for whom
to work are all reconciled by adjustment of prices.
In a command economy a government planning offi ce decides
what will be produced, how it will be produced and for whom it will be produced.
Detailed instructions are then issued to households, fi rms, and workers.
Markets in which governments do not intervene are called free markets.
The ‘invisible hand’ is the assertion that
the individual pursuit of self-interest within free markets may allocate resources
effi ciently from society’s viewpoint.
In a mixed economy the government and private sector jointly
solve economic problems. The government infl uences decisions through taxation,
subsidies and provision of free services, such as defence and the police.
It also regulates the extent to which individuals may pursue their own self-interest.
Positive economics studies objective or scientifi c explanations
of how the economy works.
Normative economics off ers recommendations based on personal
value judgements.
Microeconomics off ers a detailed treatment of individual
decisions about particular commodities.
Macroeconomics emphasizes interactions in the economy
as a whole. It deliberately simplifies the individual building blocks of the
analysis in order to retain a manageable analysis of the complete interaction
of the economy.
Gross domestic product (GDP) is the value of total output
of an economy in a given period.
The aggregate price level measures the average price of
goods and services.
The unemployment rate is the fraction of the labour force
without a job but looking for work.
