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Unformatted text preview: Economics, 9e Economics and the economy 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 societys 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. Tools of economic analysis There is a continuing interplay between models and data in the study of economic relationships. A model is a simplified framework to organize how we think about a problem. Economics, 9e Data or facts are essential for two reasons. They suggest relationships which we should aim to explain and they allow us to test our hypotheses and to quantify the effects that...
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- Spring '10