Tuesday 27 October 2009

Economics Note -- What is economics?

(Hi there. In this year I can only type notes on economics, Physics, Chemistry, probably some maths technique and LS passage.) (graph skipped.)

Opportunity cost: Highest-valued option forgone (cost of the best alternative use) Rules: 1) We only count the highest-valued option forgone, i.e., only one option is counted as cost. 2) No other (possible) choice implies no cost. 3) Cost change if and only if value of highest-valued option forgone changed, i.e., change of value on other alternatives or the chosen options will not change the cost. 4) Full cost = money cost (money spent) + non-money cost (resources spent other than money). Time cost can be monetary (in terms of income forgone) or non-monetary (in terms of another activity forgone). 5) Option considerable for cost is the option available at the moment. Paid in the past will not be counted,

Bad: We don’t desire / prefer less to more Good: We desire / prefer some to none Economic (or scarce) good: Available quantity can’t satisfy all human wants for it. Human are willing to pay for it. More of them is preferable. Free Good: Available quantity can satisfy all human wants. No one is willing to pay for it. More of them is not preferable, we only get the amount we need.

Note that free good must be free of charge, but good that is free may not be free good. Production is the process that transforms resources to goods and services. Factor of production: 1) Labour is a type of human resources. They earn wages and work for production. 2) Entrepreneurship (entrepreneur) is to organize production, making decisions and bearing risk. They earn profits for risk-taking. 3) Capital is a type of man-made resources. It is used to help production. Capital owners earn interests by providing capital. 4) Land is a type of natural resources. Land owners earn rents by providing natural resources for production. Consumption – activity to satisfy human wants. Both present and future consumption are economic goods (prefer more), since we are impatient (earlier time preferences), present consumption has a higher value than future consumption. Therefore people are willing to pay more for earlier consumption. They may borrow money and repay the money plus the interest. Therefore for a borrower, interest is the cost of earlier availability of goods or resources. They pay extra interest for earlier consumption. For a lender, interest is the compensation for deferring consumption of goods (or use of resources). They scarified money in the present and get more in the future. Then, interest rate shows the cost of earlier consumption. Flow of economic activities Firms – unit of production Household – unit of consumption Real flow (flow of goods and services including factor services): Household providing factor services to factor market and to the firms, then the firms provide goods and services to the household through product market. Money flow (money income and expenditure): For household, they provide factors services and get factor income. They pay for good and services from firms. For firms, they pay for factor services, and earn revenue from providing goods and services to household. Their exchange on good, service, income and expenditure through the factor market and product market, also household and firms are inter-related. Macroeconomics and microeconomics Microeconomics is the study on behavior of individual economic units. Macroeconomics is the study of the performance of an economy as a whole.

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