The Economic Problem Economics is: “the study of how to best allocate the earth’s limited resources to satisfy humans’ unlimited wants & needs”

Economic Concepts Scarcity: there are not enough resources to satisfy all of people’s wants if something is scarce, it will have a market value – called an economic good the earth’s resources are finite humans’ wants and needs are infinite Free Goods do not have market value because one person using some doesn’t leave less for another (eg. Sea water, sunshine, air)

Economic Study Economics is a social science - a subject concerned with human behaviour Theories are difficult to study because: - many things may change simultaneously (economists try to isolate singular events by saying ‘all other things remaining equal’ or ‘ceteris paribas’) - events can not be tested in labs

Economic Study Economic models are developed to illustrate economic events by isolating individual relationships – these are then used to make forecasts about how one event will affect others in the future Eg. If prices for chocolate rise, we will buy less chocolate and more crisps

Why Do Economists Disagree? Different opinions about who should be included in economic statistics Technical, cultural, & social changes affect behaviour and its interpretation Views differ on what policies should be carried out to affect the economy in the desired way

Economic Choices Because of scarcity, economic choices are made at all levels – consumers, firms, gov’ts Choice involves a trade-off Economic trade-off’s are measured by Opportunity Cost

Opportunity Cost Measures the cost of any economic choice in terms of the next best alternative foregone Eg. The opp. cost of working hard on homework is the party you had to miss Eg. The opp. cost of the gov’t spending £30B on a new aircraft carrier was the potential benefits to the NHS foregone