SOCIAL SCIENCE 5 ECONOMICS

FIRST QUARTER NOTES

ECONOMICS

● The efficient allocation of limited resources to meet unlimited wants

● Addresses scarcity, highlights equity
● Dependent on consumption and production
● Deals with social interactional behaviour
● Aims to attain maximum efficiency and desired level of output
● Utilizes sociology, psychology, history, anthropology and political science to
understand
○ Sociology
■ Analysis of individual interaction patterns
○ Psychology
■ Study of human behavior through a perspective, dealing with
personality, perception, and behavior
○ History
■ Study of past events in relation to the present
○ Anthropology
■ Study of humans (behavioral, biological, physiological, cultural, etc.)
○ Political Science
■ Study of the state and government, and their interactions with their
citizens

● Samuelson & Nordhaus (2011) - Economics is the study of how societies use scarce
resources to produce valuable commodities and distribute them among different people.
● McConnel & Brue (2009) - Economics is a social science concerned with how
individuals, institutions, and society make optimal (best) choices under conditions of
scarcity.
● Parkin and Bade (2002) - Economics as a social science that studies the choices that
individuals, businesses, governments, and entire societies make as they cope with
scarcity.

NOTE: Father of Economics - Adam Smith

MACROECONOMICS VS MICROECONOMICS

● MACROeconomics
○ Focuses on total production, total employment, and general price level
○ The “big picture” of economics
○ Formulates monetary and fiscal policies
● MICROeconomics
○ Deals with the individual, the firm, and the industry
○ Constitutes a segment of economy as a whole
○ Applies principle of supply and demand, studies how prices are
determined, along with market structures
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FIRST QUARTER NOTES

MACROECONOMIC GOALS

● Sustainable Economic Growth

○ Economic growth - increased capacity to produce
● Full Employment
○ All resources and technology are fully employed in production, therefore
creating more job opportunities
○ Economic imperfections are minimized
● Stable Prices
○ Encouraging competition and dismantling monopolies creates low inflation rate,
with high quality of goods and services
○ Prices should accurately depict scarcity of product (relationship between supply,
demand, and prices)

ECONOMICS AS A SOCIAL SCIENCE

Social Science
● Deals with social institutions/interactions
● Uses simplified modeling, statistical tools and mathematical models

DISCIPLINES OF SOCIAL SCIENCE

● Sociology
● Psychology
● Political Science
● Anthropology
● History
● Statistics
See definitions above (Economics)

SIGNIFICANCE OF ECONOMICS AS A SOCIAL SCIENCE

● Teaches importance of value

● Provides options
● Provides overall knowledge and perspective of the economy
● Provides government basis for formulating policies
● Can correct market failures
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FIRST QUARTER NOTES

FALLACIES IN ECONOMIC REASONING

● Post hoc fallacy

○ Correlation ≠ causation
○ “If A happened before B, then A must have caused B.”
● Fallacy of composition
○ Hasty generalization
○ “ If A is true for B, then A must be true for C to Z.”
● Failure to hold other things constant
○ The effect of a variable is analyzed on another without considering other factors
○ “Only A affects B, not including C-Z.”

PRINCIPLES IN ECONOMIC REASONING

● Decision-making
○ Trade-offs
■ Limited resources warrant choices (compromise)
○ Economization
■ Cost-benefit consideration (ideally less cost-more benefit)
○ All choices involve cost
○ Rational decisions
■ Pros and cons of choices are weighed against each other
○ Incentivization
■ Incentives are proportional to motivation (personal, financial, etc.)
(e.g. discounts)
● Social interactions
○ Trade
■ Trade benefits everyone involved (has the potential)
○ Government intervention
■ Markets organize economic activity, facilitate exchange and economic
freedom
● Mechanisms of the economy
○ Standards of living depend on the production capacities of the country

NORMATIVE VS POSITIVE ECONOMICS

● Positive Economics
○ Deals with the facts and mechanisms of the economy (descriptive)
○ Tackles production, consumption, distribution, spending, and trade
● Normative Economics
○ Focuses on value judgment, ethics, and opinion (prescriptive)
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FIRST QUARTER NOTES
KEY CONCEPTS IN ECONOMICS

● Scarcity
○ Limited resources
○ Leads to problems in allocation
■ Allocation
● Distribution of resources
● Efficiency
○ Best way of resource allocation
○ Ideally less cost with more benefits and higher quality
○ Pareto-efficiency: no individual can be better off without making anyone else
worse off (no economic greed and abuse of resources)
● Opportunity Cost
○ The value of the compromised option
○ “A is better than B, therefore I choose A.” - The value of B is the opportunity
cost.
● Goods
○ Tangible products consumed by people
● Services
○ Intangible actions availed by people

FACTORS OF PRODUCTION

● Land
○ The physical space where the production takes place
● Labor
○ The effort (physical and mental) it takes to produce
● Capital
○ Pre-requisites (finance, equipment, time, physical, human) in order to produce
products
● Entrepreneur
○ Initiates, monitors, and facilitates production

TYPES OF RESOURCES

● Natural Resources
○ Created by nature, can be renewable or non-renewable
● Human Resources
○ Composed of the workforce, the labor sector; manpower
● Capital Resources
○ Investments in physical and economic infrastructure
○ Investments in human capital; healthcare and education
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FIRST QUARTER NOTES

ECONOMIC PROBLEMS

● Limited resources
○ The resources are the factors of production
● Unlimited wants
○ Resources are consumed and have to be replenished

ECONOMIC QUESTIONS

● WHAT to produce?
○ Producers should consider the consumer’s wants and needs (demand)
○ Producers should prioritize which goods and services to be made available
due to limited resources
● HOW to produce?
○ Consider factors of production (land, labor, capital, entrepeneur)
● FOR WHOM to produce?
○ Allocation of resources must be decided efficiently, and to the appropriate
consumers

ECONOMIC SYSTEMS

ECONOMIC SYSTEM - organization of an economy within a nation

● Traditional Economy
○ The economy is perpetuated by and based on culture and tradition

ADVANTAGES DISADVANTAGES

● Proven production techniques are ● Rejects new ideas in favour of

handed down tradition
● Production is just enough to satisfy ● Lower standard of living
needs
● Less wasted resources
● Relies on the barter system

● Command Economy
○ The economy is controlled by the government only
○ Think: dictatorship
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FIRST QUARTER NOTES

ADVANTAGES DISADVANTAGES

● Has power to dramatically transform ● Is rigid; discourages innovation

economy to meet needs ● No opportunities to rise in economic
● Jobs are pre-determined status
● Basic services have low cost ● No incentives regardless of skill
level

● Market Economy
○ Interaction is between consumers and sellers only, no government
intervention (households and firms)
○ “Laissez-faire” - “allow to do”
○ Interactions of buyers and sellers determine prices of commodities/decided by
the majority
○ Heavily influenced by the invisible hand
■ Invisible hand
● Factors that influence the flow of economic activity

● Mixed Economy
○ Any form, variation, and combination of the three mentioned
○ e.g. market economy with government intervention
○ Government serves as regulatory body to address market failures

MARKET

● The market is the facilitator of exchange

TYPES OF MARKET
● Goods market
○ products
● Labor market
○ manpower
● FOREX market
○ currency
● FIN market
○ Capital, financial
● Bonds
○ Debt security
● Stock market
○ Investment in ownership of stocks
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FIRST QUARTER NOTES

GENERAL ECONOMIC FUNCTIONS

● Increase EFFICIENCY
○ Encourage perfect competition
■ Perfect competition - no firms and consumers are large enough to
affect the price of products
○ Solve externalities
○ Provide public goods

Inefficiencies in the market

● Imperfect competition - there is a presence of monopoly/ies, which can affect the
price and the quality of goods and services
● Externalities - Market activities can influence other unrelated activities, can be positive or
negative
● Positive externalities can produce public goods - everyone can use it regardless of
economic status

● Promote EQUITY
○ Fair distribution; fair taxation and subsidies
○ Progressive taxation - higher income, higher taxes, and vice versa
○ Transfer payments - cash aids
○ Subsidy - in/direct payments to support low-income/marginalized groups

● Aim for MACROECONOMIC STABILITY

○ Decrease unemployment
○ Control inflation
○ Ensure sustainable economic growth
○ Fiscal policy
■ Power to tax and spend
○ Monetary policy
■ Use and management of interest rates and budget

MARKET FAILURES

● The market fails to allocate resources efficiently

TYPES OF MARKET FAILURE

● Imperfect competition
○ Occurs when either consumer or producer can influence the price
of commodities
○ e.g. monopoly, monopsony, oligopoly
Sources of imperfect competition
SOCIAL SCIENCE 5 ECONOMICS
FIRST QUARTER NOTES

● Natural barriers
○ High capital/cost of operation needed to compete amongst
producers
● Artificial barriers
○ Patents
■ Exclusive rights to a product, idea, or innovation
○ Franchise
■ Permission granted to run a business

● Externalities
○ “Spillover” - when a market influences another, without receiving
compensation
○ Can be negative or positive

NEGATIVE EXTERNALITIES POSITIVE EXTERNALITIES

Occurs when a market influences another to Occurs when a market influences another to
be worse off, without providing compensation be better off, without receiving payment

● Public goods
○ Commodities enjoyed by everyone without exclusion
○ Is considered a form of positive externality
○ Usually provided by the government through taxation
Free-rider problem: when public goods are used but no one is willing to pay to maintain;
therefore an efficient tax system must be implemented.