Class Note 2: Basic Principles of Economics

Economics: The Study of Choices

Economics is the social science that studies how individuals, businesses, and governments
make choices on allocating resources to satisfy their wants and needs.

Key Concepts:

1. Scarcity: Limited availability of resources versus unlimited human wants.

2. Supply and Demand: The relationship between the quantity of a commodity that
producers wish to sell at various prices and the quantity that consumers wish to buy.
3. Opportunity Cost: The cost of forgoing the next best alternative when making a
decision.
4. Market Economy: An economic system where supply and demand determine the
prices of goods and services.

Types of Economic Systems:

• Traditional Economy: An economy in which traditions, customs, and beliefs shape

the goods and the products the society creates.
• Command Economy: An economy in which production, investment, prices, and
incomes are determined centrally by a government.
• Market Economy: An economy in which decisions regarding investment,
production, and distribution are based on market determined supply and demand.
• Mixed Economy: An economic system combining private and public enterprise.

Macroeconomics vs. Microeconomics:

• Macroeconomics: The study of the economy as a whole, including inflation,

unemployment, and economic growth.
• Microeconomics: The study of individuals and businesses' behavior in decision-
making and allocation of resources.