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CHAPTER
ONE
TEN PRINCIPLES OF
ECONOMICS
A household
consists
of
one
or
more
people
who
live
in
the
same dwelling
and
also
share at
meals or living accommodation, and may consist of
a single family or some
other grouping
of people.
A
household includes all the persons who occupy a
housing unit. A housing unit is a
house, an apartment, a mobile home, a
group of rooms, or a single room.
Scarcity is the fundamental economic
problem of having seemingly unlimited human
needs and wants, in a world of limited
resources.
It
states
that
society
has
insufficient
productive
resources
to
fulfill
all
human
wants
and needs. That is,
human wants are unlimited, but resources are
limited. Alternatively,
scarcity
implies that not all of society?s goals can be
pursued at the same time.
Economics
is
the
study
of
how
societies
use
scarce
resources
to
produce
valuable
commodities and
distribute them among different people.
In other words,
it explores how societies choose to use scarce
productive resources that
have
alternative uses to produce various kinds of
commodities and to distribute them
among different groups.
①
It studies how
the prices of labor, capital, and land are set in
the economy, and
how these prices are
used to allocate resources.
②
It explores the
behavior of the financial markets, and analyzes
how they allocate
capital to the rest
of the economy.
③
It examines the distribution of income,
and suggests ways that the poor can be
helped without harming the performance
of the economy.
④
It
looks
at
the
impact
of
government
spending,
taxes,
and
budget
deficits
on
growth.
⑤
It studies the swings in unemployment
and production that make up the business
cycle, and develops government policies
for improving economic growth.
⑥
It examines the
patterns of trade among nations and analyzes the
impact of trade
barriers.
⑦
It looks at
growth in developing countries, and proposes ways
to encourage the
efficient use of
resources.
Microeconomics
Microeconomics
is
one
of
branches
of
economics
that
is
concerned
with
the
behavior of individual
entities such as markets, firms, and households.
Macroeconomics
Macroeconomics is one of
the
branches of economics that is concerned with the
overall performance of the economy.
1
Efficiency means the most effective use
of a society‘s resources in satisfying people‘s
wants
and
needs.
In
other
words,
efficiency
means
that
the
economy
is
producing
efficiently,
and
the
economy‘s
resources
are
being
used
as
effectively
as
possible
to
satisfy people‘s needs and
desires.
Technical
efficiency
is
a
situation
in
which
the
maximum
possible
output
is
being
produced from a given collection of
inputs.
Inefficiency
refers
that
waste
and
mismanagement
are
the
results
of
a
firm‘s
operating below its potential.
Sometimes,
inefficiency
results
from
mismanagement
of
the
economy
instead
of
mismanagement of individual private
firms.
Equity
means
the
property
of
distributing
economic
prosperity
fairly
among
the
members
of society.
Compared with
efficiency that means society is getting the most
it can from its scarce
resources,
equity
means
the
benefits
of
those
resources
are
distributed
fairly
among
society‘s
members.
Taking the economy
as a whole pie, efficiency refers to the size of
the economic pie,
and equity refers to
how the pie is divided. Efficiency and equity are
the goals for the
design of government
policies, which are conflicting.
Opportunity cost is the value of the
best alternative sacrificed when taking an action,
that
is,
what
people
have
to
give
up
the
next
most
attractive
alternative
when
they
make
the best choice.
That is, the
opportunity cost of an item is what you give up to
get that item.
Examples for the
Opportunity Cost
Example1:
A
person
who
has
$$15
can
either
buy
a
CD
or
a
shirt.
If
he
buys
the
shirt
the
opportunity cost is the CD and if he
buys the CD the opportunity cost is the shirt.
Example 2.
A
person who decides to quit his or her job and to
go back to school to increase
their
future earning potential has an opportunity cost
equal to their lost wages for the
period of time they are in school.
Conversely,
if
they
elect
to
remain
employed
and
not
return
to
school
then
the
opportunity cost of that
action is the lost potential wage increase.
Marginal changes are the
small incremental adjustments to a plan of action,
which are
involved in many decisions in
life.
A
market
economy
is
an
economy
in
which
decisions
regarding
investment,
production, and distribution are based
on supply and demand, and prices of goods and
services are determined in a free price
system. The major defining characteristic of a
market economy is that investment
decisions and the allocation of producer goods are
mainly
made
by
negotiation
through
markets.
This
is
contrasted
with
a
planned
economy,
where
investment
and
production
decisions
are
embodied
in
a
plan
of
production.
2
Market failure refers to a
situation in which a market left on its own fails
to allocate
resources efficiently.
Externality is the impact
of one person‘s actions on the
well
-being of a bystander.
An
externality
occurs
in
economics
when
a
decision
(for
example,
to
pollute
the
atmosphere)
causes
costs
or
benefits
to
individuals
or
groups
other
than
the
person
making
the decision.
Market power is the ability of a single
economic actor or small group of actors to have
a substantial influence on market
prices.
Productivity
is
an
average
measure
of
the
efficiency
of
production,
which
is
the
quantity
of goods and services produced from each hour of a
worker‘s time. It can be
expressed as
the ratio of output to inputs used in the
production process, i.e. output per
unit of input. When all outputs and
inputs are included in the productivity measure it
is
called total productivity.
Outputs
and
inputs
are
defined
in
the
total
productivity
measure
as
their
economic
values.
The
value
of
outputs
minus
the
value
of
inputs
is
a
measure
of
the
income
generated in a production process. It
is a measure of total efficiency of a production
process and as such the objective to be
maximized in production process.
In economics,
inflation
is a sustained
increase in the general price level of goods and
services in an economy over a period of
time. When the price level rises, each unit of
currency buys fewer goods and services.
Consequently, inflation reflects a reduction in
the
purchasing
power
per
unit
of
money
–
a
loss
of
real
value
in
the
medium
of
exchange and unit of account within the
economy. A chief measure of price inflation is
the inflation rate, the annualized
percentage change in a general price index
(normally
the consumer pric index) over
time. The opposite of inflation is deflation.
In economics, the
Phillips curve
is a
historical inverse relationship between rates of
unemployment and corresponding rates of
inflation that result in an economy. Stated
simply,
decreased
unemployment,
(i.e.,
increased
levels
of
employment)
in
an
economy will correlate
with higher rates of inflation
PPF
The
production-possibility
frontier
is
a
graph
that
shows
all
of
the
combinations
of
goods
and
services
that
can
be
produced
if
all
of
society‘s
resources
are
used
efficiently.
In other words, the
production-possibility frontier giving the
different combinations of
goods
that
can
be
produced
with
the
resources
and
technology
currently
available
shows the maximum
amounts of production that can be obtained by an
economy, given
its technological
knowledge and quantity of inputs available and
represents the menu
of goods and
services available to society.
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