Class notes Economics and Business studies

ECONOMICS SUMMARY NOTES


 What is economics?

Economics is the study of how society allocates scarce resources and
goods. Resources are the inputs that society uses to produce output, called goods.
Resources include inputs such as labor, capital, and land. Goods include products such as
food, clothing, and housing as well as services such as those provided by barbers, doctors,
and police officers. These resources and goods are considered scarce because of society's
tendency to demand more resources and goods than are available.

While most resources and goods are scarce, some are not—for example, the air that we
breathe. A resource or good that is not scarce, even when its price is zero, is called
a free resource or good. Economics, however, is mainly concerned with scarce resources
and goods. It is the presence of scarcity that motivates the study of how society allocates
resources and goods.

One means by which society allocates scarce resources and goods is the market system.
The term market refers to any arrangement that allows people to trade with one another.
The market system is the name given to the collection of all markets and also refers to the
relationships among these markets. The study of the market system, which is the subject of
economics, is divided into two main branches or theories; they
are macroeconomics and microeconomics.

 Macroeconomics

The prefix macro means large, indicating that macroeconomics is concerned with the
study of the market system on a large scale. Macroeconomics considers
the aggregate performance of all markets in the market system and is concerned with the
choices made by the large subsectors of the economy—the household sector, which includes
all consumers; the business sector, which includes all firms; and the government sector,
which includes all government agencies.

 Microeconomics

The prefix micro means small, indicating that microeconomics is concerned with the study
of the market system on a small scale. Microeconomics looks at the individual
markets that make up the market system and is concerned with the choices made by small
economic units such as individual consumers, individual firms, or individual government
agencies.




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, TYPES OF INFLATION
Description of inflation

 Inflation: A general and sustained rise in the price levels of goods and services for a
given period.

 Characteristics:

 It is a continuous process.
 It refers to a rise in prices in general.
 It involves a considerable increase in prices.
 It causes a decline in the purchasing power of money.

 Kinds of inflation

Consumer inflation

There are four different types of consumer inflation:

 Headline inflation: as determined using the CPI.
 CPIX inflation: excludes mortgage bond interest rates.
 Core inflation: excludes items that have highly volatile prices and items that are
affected by government intervention and policy. E.g. of excluded items are fresh
and frozen meat and fish, VAT, etc.
 Administered prices inflation: prices of goods and services that are set by
government or controlled by government appointed authorities.

 In composing CPI, Stats SA does five things:

 Identifies and selects the goods and services to be included in a ‘basket of items’.
 Assigns a weight to each good or service.
 Decides on a base year.
 Decides on a formula.
 Decides on the collection of prices.

 Producers’ inflation
o This is the production price index (PPI).

(Economics in action Enjoy economics p.257)

 All-inclusive inflation
 When the prices of all final goods and services are checked, we use the implicit GDP
deflator.




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