Introduction to Markets and Market Failure
1.1 nature of economics
Economics as a Social Science
Social science
-economics- scientific study of the ownership, use, and exchange of scarce resources
-social science- uses scientific methods to build theories that can help explain behaviour of individuals, groups and organisations in
society
-postulates theory /prediction which is capable of refutation + gathers evidence thru controlled experiments to support or refute -> accepts/
modifies/ refutes theory
-economic model – theoretical construct representing economic processes by a set
of logical relationships between them
-hard to set up experiments to test hypothesis- other variables are always changing
so it’s difficult to decide whether evidence supports hypothesis or not
-not a hard science as it studies human behaviour and human behaviour can’t be
reduced to scientific law -laws in economics aren’t definite as we dk what exactly an
individual will do
-hypothesis doesn’t need to have numerical values
eg behaviour observed - gov add 10% tax on sugary drinks
hypothesis abt the consequences - there will be less sales of sugary drinks
ceteris paribus- all things being equal (assumed when creating economic models) - assuming
other factors influencing ... have changed
,Positive and Normative Statements
-positive statements- objective statement of fact that can be scientifically tested to
see if its correct or not
-providing objective and opinion free analysis
eg. higher interest rates will reduce house prices
-normative statement- subjective statement that includes value judgement and
cannot be refuted by just looking at evidence
-making decisions and providing judgments that are based on opinions/values
-mostly contain ‘should’/ ‘ought to’
eg. gov should increase minimum wage to reduce poverty
-value judgement- evaluative judgement of how good or bad u think an idea or action
is
-value judgements are important in influencing policies as it affects decision of
policies as economists may have diff judgements from the same stats
,The Economic Problem
-basic economic problem- there are scarce resources compared to unlimited wants
Types of resources
-renewable energy – resource made from smnth which can be renewed itself
-non renewable energy – resource which once exploited cannot be replaced easily
Opportunity cost
-opportunity cost - benefit that would have been derived by an option about
allocation of resources not chosen (the thing not chosen is opportunity cost)
-importance of OC to economic agents – they would have to choose smnth to
buy/produce over smnth else
Factors of Production
-factors of production - inputs to produce goods and services in an economy
-production - process that converts the factors of production into goods and services
-factors of production (CELL)
1. enterprise – when other factors are organised to make goods and services
-entrepreneurs are those that take forward a business idea and organise all other
factors of production to create the final product
-also bears financial risk of project/ is held responsible by those funding
2. land – natural resources in an economy (raw materials, sea, ground)+
transportation
3. labour- workforce of an economy in terms of both physical and mental effort
involved in production
4. capital – human made aid to production + used to support infrastructures
Production Possibility Frontier
-PPF shows the maximum possible output combinations of two goods or services an
economy can achieve when all resources are fully and efficiently employed
-opportunity cost can be shown when there is maximum efficiency as less of A has to
be produced to produce some of B
-scarcity can be shown – impossible to produce outside of PPF curve as there aren’t
enough resources
, -utility – benefit gained from consuming something
-marginal utility-change in benefit from consuming an extra unit
-consumer goods- goods that are demanded and bought by households and
individuals
-capital goods- goods produced to aid production of consumer goods in the future
-can’t be outside the curve- only inside or on the curve
-negative output gap – when acc output is less than what
an economy could produce at full capacity
-opportunity cost and marginal gains here is constant as resources
are equally suited to produce both products
-opportunity cost (healthcare) is increasing in curved PPF as
the amount of healthcare lost at each point is increasing
(consequence)
-marginal gains (education) is diminishing (consequence)
Reason -resources are more specialised towards education
as more healthcare is lost as education increase
Types of efficiency
-productive efficiency - points on the curve (at max efficiency)
-productive inefficient- points inside curve (not all resources used)
1.1 nature of economics
Economics as a Social Science
Social science
-economics- scientific study of the ownership, use, and exchange of scarce resources
-social science- uses scientific methods to build theories that can help explain behaviour of individuals, groups and organisations in
society
-postulates theory /prediction which is capable of refutation + gathers evidence thru controlled experiments to support or refute -> accepts/
modifies/ refutes theory
-economic model – theoretical construct representing economic processes by a set
of logical relationships between them
-hard to set up experiments to test hypothesis- other variables are always changing
so it’s difficult to decide whether evidence supports hypothesis or not
-not a hard science as it studies human behaviour and human behaviour can’t be
reduced to scientific law -laws in economics aren’t definite as we dk what exactly an
individual will do
-hypothesis doesn’t need to have numerical values
eg behaviour observed - gov add 10% tax on sugary drinks
hypothesis abt the consequences - there will be less sales of sugary drinks
ceteris paribus- all things being equal (assumed when creating economic models) - assuming
other factors influencing ... have changed
,Positive and Normative Statements
-positive statements- objective statement of fact that can be scientifically tested to
see if its correct or not
-providing objective and opinion free analysis
eg. higher interest rates will reduce house prices
-normative statement- subjective statement that includes value judgement and
cannot be refuted by just looking at evidence
-making decisions and providing judgments that are based on opinions/values
-mostly contain ‘should’/ ‘ought to’
eg. gov should increase minimum wage to reduce poverty
-value judgement- evaluative judgement of how good or bad u think an idea or action
is
-value judgements are important in influencing policies as it affects decision of
policies as economists may have diff judgements from the same stats
,The Economic Problem
-basic economic problem- there are scarce resources compared to unlimited wants
Types of resources
-renewable energy – resource made from smnth which can be renewed itself
-non renewable energy – resource which once exploited cannot be replaced easily
Opportunity cost
-opportunity cost - benefit that would have been derived by an option about
allocation of resources not chosen (the thing not chosen is opportunity cost)
-importance of OC to economic agents – they would have to choose smnth to
buy/produce over smnth else
Factors of Production
-factors of production - inputs to produce goods and services in an economy
-production - process that converts the factors of production into goods and services
-factors of production (CELL)
1. enterprise – when other factors are organised to make goods and services
-entrepreneurs are those that take forward a business idea and organise all other
factors of production to create the final product
-also bears financial risk of project/ is held responsible by those funding
2. land – natural resources in an economy (raw materials, sea, ground)+
transportation
3. labour- workforce of an economy in terms of both physical and mental effort
involved in production
4. capital – human made aid to production + used to support infrastructures
Production Possibility Frontier
-PPF shows the maximum possible output combinations of two goods or services an
economy can achieve when all resources are fully and efficiently employed
-opportunity cost can be shown when there is maximum efficiency as less of A has to
be produced to produce some of B
-scarcity can be shown – impossible to produce outside of PPF curve as there aren’t
enough resources
, -utility – benefit gained from consuming something
-marginal utility-change in benefit from consuming an extra unit
-consumer goods- goods that are demanded and bought by households and
individuals
-capital goods- goods produced to aid production of consumer goods in the future
-can’t be outside the curve- only inside or on the curve
-negative output gap – when acc output is less than what
an economy could produce at full capacity
-opportunity cost and marginal gains here is constant as resources
are equally suited to produce both products
-opportunity cost (healthcare) is increasing in curved PPF as
the amount of healthcare lost at each point is increasing
(consequence)
-marginal gains (education) is diminishing (consequence)
Reason -resources are more specialised towards education
as more healthcare is lost as education increase
Types of efficiency
-productive efficiency - points on the curve (at max efficiency)
-productive inefficient- points inside curve (not all resources used)
