Nature of Economics - Introductory Concepts

Here is a selection of key introductory concepts covering the nature of economics as a social science.

Economics is a social science which means it studies society and relationships between people. Economists analyse many different aspects of human behaviour and decision-making within and between markets, organisations and countries.

Economics is not really about money, instead it is about the decisions that we take in our everyday life – from who to date, whether to buy a house or which job to apply for. For every choice we make as individuals or as a society, there is a cost and a benefit.

What is meant by?

Assumption

Simplifying assumption used in analysis e.g. assumed behaviour of consumers and businesses

Ceteris Paribus Assumption

All other factors held constant – helps to isolate the impact of one factor e.g. a change in either price or income on demand

Economic Agents

Consumers, producers, the government – anyone engaged in some form of economic activity

Economic Model

Theoretical construct – building a hypothesis about behaviour that can be tested, supported, amended, rejected

Economic Problem

Arises from the scarcity of resources – e.g. limited inputs available to satisfy unlimited needs and wants

Economics

The study of the allocation of scarce resources among competing uses in a way that achieves an inclusive and sustainable progress in human development

Opportunity Cost

The value of a choice measured in terms of the next best alternative option that is given up (sacrificed)

Social Science

The study of human society, relationships and behaviours

Value Judgement

A value judgement contains a normative statement concerning what ought / should happen in a given situation

What is the difference between?

Social science and natural science

• Social science: Studies of human behaviour, dynamic inter-relationships
• Natural science: Studies of the natural world, quantitative, blind, controlled experiments

Positive and normative statements

• Positive statements: Objective, testable, empirical
• Normative statements: Contain subjective arguments, value judgements

Renewable and non-renewable resources

• Renewable resources: Can be replenished, solar power, fish stocks, forestry
• Non-renewable: Finite resources, cannot be renewed, e.g. crude oil and gas

Mean income and median income

• Mean income: Income per head of population
• Median income: Middle part of an income distribution – 50% are below and 50% are above

What is meant by?

Capital goods

Tangible assets, such as buildings, machinery, equipment, vehicles and tools that are then used to produce other goods and services

Consumer goods

Bought and consumed by households to satisfy current wants or needs.

Economic decline

A contraction in the value of national output shown by a negative rate of real GDP growth in a recession

Economic growth

A long-run increase in a country’s productive capacity and capabilities shown by growing real national output

Efficient allocation of resources

Combination of scarce inputs and outputs such that any change in the economy can make someone better off only by making someone worse off (pareto efficiency)

Infrastructure

Includes physical capital such as transport networks, energy, power and water supply and also telecommunications networks

Production possibility frontier

Combinations of two or more products that can be supplied using all available inputs efficiently

Productive potential

Shows the maximum limits to output. Capacity can be defined as: the maximum output that a business can produce in a given period with the available resources

Trade-off

A trade-off arises where having more of one thing potentially results in having less of another. The balance between two desirable outcomes, where both are not achievable

Unemployment

People of working age who are willing, able and available to take paid work but who do not currently have a job.

Give Me Three

Advantages from competition between suppliers in a free-market economic system:

1. Competition drives prices down for consumers leading to higher real income
2. It stimulates innovation which improves product range & quality
3. Competition will ensure that firms move towards productive efficiency.

Ways in which markets may fail to achieve an efficient allocation of scarce resources:

1. When one or more firms have monopoly power and charge higher prices
2. When consumers have imperfect information when making choices
3. When production and/or consumption leads to external costs & benefits

Key features of a command (planned) economic system:

1. Resources are largely state-owned i.e. through nationalised industries
2. The government determines which products are to be supplied
3. Market prices play little or no part in informing resource allocation decisions

Problems with centrally planning the allocation of resources:

1. Government agencies usually have poor information about what to produce or rely too heavily on political priorities rather than using market forces
2. Inefficient firms (state-owned enterprises) are protected and kept going; making it hard for scarce resources to move to dynamic and efficient firms.
3. Price controls invariably lead to shortages and surpluses – central planners are unable/unwilling to respond quickly to changing needs and wants

Key roles for the state (government) in a mixed economy:

1. Providing public goods that private sector supplies might be able to
2. Use taxes and subsidies to change market prices and redistribute income and wealth
3. Regulate industries when there is a need for consumer protection e.g. to counter-balance the monopoly power of large-scale businesses

Functions of money:

1. Medium of exchange
2. Store of value
3. Standard of deferred payment