Unit 1 Introduction to economics SL

Economics is a social science studying how people interact and use resources to improve economic well-being within institutions, values and the natural environment. Microeconomics studies individual consumers, firms and markets; macroeconomics studies economy-wide output, employment, inflation and policy.

Nine concepts organize analysis: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence and intervention. An economic decision may improve one outcome while creating opportunity costs or distributional effects elsewhere.

Identify whether the issue is micro or macro, then select the concept that reveals the central relationship—for example scarcity for a resource constraint, equity for distribution, or intervention for a policy choice.

A household choosing energy use is microeconomic; economy-wide inflation is macroeconomic. A subsidy for renewable energy connects intervention, sustainability, change and interdependence.

Economics is not only money or business, and economic well-being is not identical to income. Positive-versus-normative methodology belongs to the neighbouring 1.2 Objective.

Choice exists because wants are unlimited while resources such as time, income, labour and natural inputs are scarce. Choosing one option means giving up the next-best alternative.

Opportunity cost links scarcity to decisions: the cost is the value of the best forgone option, not every possible alternative.

Name the constrained resource, the chosen option and the best forgone alternative.

Using an evening to study economics means giving up the best alternative, such as paid work or rest, not every activity you could have done.

A financial price is not always the opportunity cost; time and non-market effects can matter.

Factors of production are land (natural resources), labour (human effort), capital (produced means of production) and entrepreneurship (organising resources and bearing risk). Scarcity creates a sustainability challenge when present choices deplete finite resources. A genuinely abundant free good has no opportunity cost at the point of use; most goods are economic goods because using resources for them forgoes another use.

Every economy must decide what to produce, how to produce and for whom. Market, command and mixed systems answer these questions through different combinations of prices, planning, ownership and regulation.

Institutions shape incentives and distribution: markets may coordinate information but can produce inequality or external costs; planning can pursue equity but risk weak incentives or information problems.

Identify who makes the decision, what signal or rule guides it and who bears the result.

A mixed system may let prices guide food production while government funds healthcare and regulates pollution.

No system is purely market or command in practice; evaluate the mechanism and outcome.

A production possibilities curve shows the maximum combinations of two outputs possible with given resources and technology. Points inside are inefficient, on the curve efficient, and outside unattainable under current conditions.

The slope represents opportunity cost; a bowed-out curve reflects increasing opportunity cost when resources are specialised. Growth shifts the frontier outward.

Locate the point, describe efficiency and explain which resource or technology change would move it.

Moving from 10 units of food to 12 may require giving up 4 units of clothing; the slope is the trade-off at that point.

A point outside is not “inefficient”; it is unattainable unless capacity changes.

A PPC assumes fixed resources and technology over the period, full productive potential on the frontier and two aggregated outputs. A straight PPC has constant opportunity cost; a bowed-out PPC has increasing opportunity cost because resources are not equally suited to both outputs. Movement from inside to the frontier is actual growth from using idle resources, while an outward shift is growth in production possibilities from more or better resources or technology.

The circular flow model shows income, spending and output moving between households and firms, with injections and leakages linking the economy to government, finance and international trade.

Household spending becomes firm revenue and wages; saving, taxes and imports leak from the basic flow, while investment, government spending and exports inject demand.

Trace one flow and check whether an injection or leakage changes total activity.

If households save more while investment does not rise, spending may fall and firms reduce output and income.

The model tracks flows, not welfare; more spending does not automatically mean better outcomes.

Economic methodology uses models, assumptions and evidence to simplify complex systems and test explanations. Positive statements can be checked against evidence; normative judgements depend on values.

Ceteris paribus isolates one relationship; reasoning connects observations, theory and predictions. Models are useful only within assumptions.

State claim, assumptions, evidence and whether it is positive or normative.

A model predicts a tax reduces demand holding other factors constant; data can test it, but whether the tax is desirable is normative.

A model is not reality and correlation alone does not prove causation.

A positive method moves from logic and hypotheses through a simplified model to predictions, empirical testing and possible refutation; evidence that repeatedly contradicts a prediction should lead to revision or rejection. Normative policy judgments depend on values. Equality means sameness in a stated dimension, while equity concerns fairness and may justify unequal treatment or outcomes; neither term has one uncontested policy interpretation.

Economic thought is historically situated. In the 18th century Adam Smith emphasized specialization, exchange and laissez-faire; 19th-century classical thought developed utility, marginal reasoning and Say's law, while Marx criticized capitalist ownership and distribution.

The 20th-century Keynesian revolution argued that deficient aggregate demand can sustain unemployment and justify macroeconomic intervention. Monetarist and new classical counter-revolutions restored emphasis on money, expectations, markets and limits of discretionary policy.

In the 21st century, behavioural economics uses psychology to question fully rational choice, while sustainability and interdependence connect economy, society and environment. Circular-economy thinking seeks to reduce waste by keeping resources in use rather than following a linear take–make–dispose model.

A recession can be interpreted through Keynesian demand failure, whereas a new classical account may emphasize expectations and market adjustment. The different mechanism changes the recommended policy.

These are evolving analytical traditions, not rigid labels. Compare their assumptions, mechanism and context; do not attribute every modern policy to one thinker or claim that circularity eliminates all scarcity.