An Introduction to the Study of Economics Chapter 1 Economics An Introduction to the Study of Economics

Definition of Economics Economics is a social science that studies human behaviour in relation to people’s aims and the scarce resources available to them to achieve these aims, knowing that the resources have alternative uses.

Aims: Needs and Wants The “aims” mentioned in the definition refer to the “needs” and “wants” of people. Needs are the essentials that are required for survival. For example: basic food basic clothing basic shelter. Wants are any items that we may desire in excess of our needs. For example: meals in restaurants designer clothing a mansion sports cars holidays.

Factors of Production The scarce resources mentioned in the definition refer to the factors of production. A factor of production is anything that helps to create wealth – that is, goods and services.

Factors of Production We classify the factors of production into four convenient groups: Land Labour Capital Enterprise

Land Land is anything provided by nature that helps to create wealth. 14/09/2018 Land Land is anything provided by nature that helps to create wealth. Examples are: a farm the sea gas. R. DELANEY

Land Land has two characteristics: It is fixed in supply. It has no cost of production.

Labour Labour is any human effort that helps to create wealth. Examples are: office workers construction workers teachers entertainers.

Capital Capital is anything made by man that is then used to help to create wealth. Or Capital is wealth that is used to help create more wealth. Examples are: computers tractors factories.

Enterprise/Organisation Enterprise is that special form of human activity that organises (human activity: managing) the other factors of production and bears the risk (human activity: investing) involved in production.

Choices Economics deals with making choices in order to satisfy as many of the needs and wants as is possible with the limited resources available. People decide their needs and wants and economists tell them how to get them. Economics is regarded as a neutral science – that is, economists do not tell people what they should require from their economies.

Opportunity Cost I want a yacht. I want a plane. 14/09/2018 Opportunity Cost I want a yacht. I want a plane. I can’t afford both of them … If I buy the yacht, I must do without the plane. Opportunity cost is the item you do without when you have to make a choice between the purchase of two items. The plane is the opportunity cost of buying the yacht. R. DELANEY

Wealth is a stock of goods and services.

Income is a flow of goods and services.

Income and Wealth Having a large income does not guarantee that you will be wealthy. If you spend all of your income on consumer goods then, while you have a high standard of living, you have no wealth left over.

Aims of Economics The aims of economics are: To achieve efficiency in the economy – that is, to get the best possible use of the scarce resources. To achieve an equitable distribution of wealth – that is, to provide an income for those who can’t provide for themselves. To create a stable economy – that is, to get rid of “booms” and “slumps” in the economy.

Microeconomics and Macroeconomics Microeconomics deals with the individual units in the economy: the individual consumer, the household unit and the producer of goods and services. Thus it deals with demand, supply and prices. Macroeconomics deals with broad decision making and aggregate figures in relation to the economy as an entire unit. It deals with topics such as international trade, national income and employment.