6355 Lecture Notes - Lecture 1: Land Degradation, Opportunity Cost, Mixed Economy
Lecture 1
• Resources are limited
o Human, resources, capital and machinery, natural resources.
• Human wants are unlimited
o Leisure, possessions, world concerns, lifestyle.
• Economics studies anything that involves the process of meeting these wants with
scarce resources.
• Microeconomics studies individual units:
o Households
o Firms
o Industries
• Macroeconomics studies the economy as a whole:
o Total output
o Unemployment
o Economic growth
o Inflation
• Centrally planned economy: an economy in which the government decides how
economic resources will be allocated.
• Market economy: an economy in which the decisions of the households and firms
interacting in markets determine the allocation of economic resources.
• Mixed economy: an economy in which most economic decisions result from the
interaction of buyers and sellers in markets, but in which the government play a
significant role in the allocation of resources.
• Assumptions help us to simply complex situations, focusing our attention on the details
that are most relevant to the problem at hand.
• Using assumptions we can construct economic models to learn about the world.
• Positive analysis: analysis concerned with what is.
o Involves value-free statements that can be tested using the facts.
• Normative analysis: analysis concerned with what ought to be.
o Involves making value judgements that cannot be tested.
• Opportunity Cost
o Resources are limited
o Choices between alternative options must be made
o Examples
• Business
• Individuals
• Government
• Opportunity cost is defined as the next best alternative that is foregone when a choice is
made.
• In economics, opportunity cost is essential
o All cost measurements include the opportunity cost.
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Document Summary
Industries: macroeconomics studies the economy as a whole, total output, unemployment, economic growth. Involves value-free statements that can be tested using the facts: normative analysis: analysis concerned with what ought to be. Involves making value judgements that cannot be tested: opportunity cost, resources are limited, choices between alternative options must be made, examples, business. Individuals: government, opportunity cost is defined as the next best alternative that is foregone when a choice is made. In economics, opportunity cost is essential: all cost measurements include the opportunity cost, example: a firms earns 3% accounting profit on an investment. If the economy is operating at point inside the curve, maximum possible output is not being produced - it is an inefficient point: a ppf will shift inwards when there is a loss of resources. For example: climate deterioration, land degradation, war, famine, a ppf will shift outwards when there is a gain of resources or technology.