Introduction to Economics

System used to make decisions about what is produced, how production is undertaken and who gets to consume the goods and services produced

Decisions on what to produce and consume made by individual firms and consumers (decentralised decision-making)

Decisions on what to produce and who should get the resulatant output made by a central planner

The opportunity cost of a given action is the value of the next best action you could have chosen to pursue

In analysing how agents behave, economists focus on marginal decisions, whereby people compare the costs and benefits of doing a little bit more (or less of some activity)

Anything that rewards people from acting in a certain way. People exploit opportunities to gain rewards and make themselves better off

People specialise in thsoe tasks for which they have an instrinsic talent (comparitive advantage). Peopke who specialise tend to become more proficient and more productive

Coordinate people's activities by giving people incentives to produce good and services that other peopke want to have and this can increase efficiency. Reward people with profits and punish peopke with losses

An outcome is efficient if it is impossible to change the way that resources are allocated in such a way that at least one person is made better off without someone else being made worse off (Pareto efficiency)

Perfectly Competitive Markets tend to generate an efficient allocation of resources by providing incentives for efficient uses of resources by self-interested agents

Insufficient competition, lack of information, markets for important goods do not exist, externalities

Simplified representations of aspects of the real economy

Illustrates the trade-offs facing an economy that produces two goods. It shows the maximum quantity of one good that can be produced given the quantity of the other good produced

Expands the production possibility frontier and allows moving from point A to point B, where society can have more of both goods x and y

Gets steeper moving from left to right representing increasing opportunity cost

Everyone can be better off if they specialise in one activity and then trade with each other than if they try to be self sufficient (autarky)