Topic 1: Basic Economic Ideas and Resource Allocation

1.1 Scarcity, Choice, and Opportunity Cost

• Scarcity = limited resources vs unlimited wants.
• Needs (food, clothing) ≠ Wants (TV, cars).
• Opportunity cost = next best alternative forgone when making a choice.
• Key resource allocation questions:
• What to produce?
• How to produce?
• For whom to produce?

 

1.2 Economic Methodology

• Economics = social science (studies human behaviour + uses models).
• Positive statements = fact-based (e.g., “Inflation is 8%”).
• Normative statements = opinion-based (e.g., “Inflation is too high”).
• Ceteris paribus = “other things equal.”
• Time frames:
• Short run = only some inputs change (e.g., labour).
• Long run = all inputs can change.
• Very long run = even technology, laws, and social factors change.

Memory cue: Positive = provable; Normative = norms/opinions.

 

1.3 Factors of Production

• Land → rent.
• Labour → wages.
• Capital → interest/returns.
• Enterprise → profit.
• Human capital = skills/knowledge; Physical capital = machinery, factories.
• Specialisation = focus on certain goods → efficiency but risk of redundancy.
• Division of labour = tasks split → higher output but possible boredom.

 

1.4 Economic Systems

• Market economy → decisions via demand & supply, minimal government role.
• Planned economy → government controls all decisions, prices, wages.
• Mixed economy → blend of private + public ownership, common in reality.

 

1.5 Production Possibility Curve (PPC)

• Shows max output combinations of two goods.
• Points on curve = efficient use of resources.
• Inside curve = inefficiency.
• Outside curve = unattainable.
• Straight line PPC = constant opportunity cost.
• Curved PPC = increasing opportunity cost.
• Shifts outward = growth (better resources/tech).
• Shifts inward = decline (loss of resources).

 

1.6 Classification of Goods

• Private goods = excludable + rival.
• Free goods = no scarcity, no price (air).
• Public goods = non-excludable + non-rival (streetlights).
• Quasi-public goods = partly public (toll roads).
• Merit goods = under-consumed due to info failure (education, healthcare).
• Demerit goods = over-consumed due to info failure (smoking, junk food).