Capital includes physical plants, machinery, and equipment used to produce other goods.

Entrepreneurship is the creative ability of individuals to seek profits by taking risks and

combining resources to produce innovative products. Entrepreneurship can be viewed as a

special type of the resource, labour.

Land refers to any resource provided by nature that is used to produce a good or service.

The labour resource refers to the mental and physical capacity of workers to produce goods and

services. This resource is measured by the number of workers as well as the skills and quality of

workers.

Microeconomics is the study of how prices and quantities are determined through interactions
between buyers and sellers (individuals and firms) in individual markets. Therefore,
microeconomists analyse the decisions of firms (such as pricing) and those of consumers (such as
shopping choices), as well as how government policies affect those decisions.

Macroeconomics is the study of factors that affect the entire economy. Therefore,
macroeconomists analyse how economic growth, inflation, and unemployment respond to policy
decisions of governments and central banks, changes in aggregate spending or savings, and
supply or demand shocks.

Model building three main steps:

1. Problem identification. At this stage, the issue to be studied is defined.

2. Model development. Here, the key variables in the model used to investigate the phenomenon

under study are selected.

3. Testing a theory. In this stage, the researcher collects data that are used to test the model

developed in the second step. Upon testing, the researcher either accepts or rejects his or her

model.

A positive statement is one that is verifiable. The first and second statements fall into this
category.

A normative statement is one that is based on subjective value judgements. It offers an opinion
as to the way the world should be and is not testable. The third and fourth statements fall into this
category.

A common error in reasoning with economic models is to confuse association (or correlation) with
causation. There is no reason to believe that any two associated variables exhibit a cause-and-
effect relationship. Indeed, the association of any two variables may be purely coincidental. A
model is valid only if a cause-and-effect relationship is identified and stable over time.

Economics is the study of how society chooses to allocate its scarce

resources to the production of goods and services in order to satisfy
unlimited wants. Read the material under 'The problem of scarcity' in Chapter
1.