MICRO Topic 1a the basic economic problem

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  • Basic Economic  Problem
    • Scarcity and choice
      • Resources are scarce (finite). Wants and needs are infinite. This means that choices have to be made on how they are employed.
        • Making choices involves a trade off which means that something is sacrificed.
          • The idea of giving something up is called opportunity cost.
            • Opportunity cost definition: the value of the next best alternative that is foregone when a choice is made
    • The economic problem
      • Humans have unlimited wants and needs, but the world has a finite amount (limited) resources. Choices have to be made on how these resources are allocated.
        • Economic agents make these decisions. They can only acquire a limited amount of resources at any moment in time
          • Economic agents: consumers (households), businesses (firms), the government.
      • resources have to be allocated between competing uses.
        • Humans have unlimited wants and needs, but the world has a finite amount (limited) resources. Choices have to be made on how these resources are allocated.
          • Economic agents make these decisions. They can only acquire a limited amount of resources at any moment in time
            • Economic agents: consumers (households), businesses (firms), the government.
      • The economic problem decides what is produced, how it is produced and for whom it is produced, given the scarcity of resources.
      • an economy is a system that attempts to solve the basic economic problem of scarcity.
    • Positive and normative economics
      • Positive economics studies the subject scientifically/ objectively.
        • Positive statements can be proved true or false using evidence that supports of refutes them. Statements about the future can be positive.
          • Economists use positive and normative economics to find out how economies work and to influence policy debates.
            • Normative economics uses value judgement.
              • Normative statements cannot be supported or refuted. They are opinions on how markets and economies should work.
                • Normative statements usually contain words like 'should' and 'ought'. HOWEVER, positive statements can also contain them.
      • Normative economics uses value judgement.
        • Normative statements cannot be supported or refuted. They are opinions on how markets and economies should work.
          • Normative statements usually contain words like 'should' and 'ought'. HOWEVER, positive statements can also contain them.
    • Economic resources (factors of prod.)
      • Land- natural resources
      • Labour- the quantity and quality of human resources.
      • Capital- man made aids to prod. i.e machinery.
      • Entrepreneurship- seeking out profitable opportunities for prod. and risk-taking to attempt to exploit them.
        • Entrepreneurs take risks with their own and other's financial capital. They are motivated by profit.
  • Normative statements can contain positive economics to back it.

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