Summarised – The Nature of Economics

Resource Description

The Nature of Economics – Summary 

Y = C + S + T + M

Income = consumption + saving + taxation + imports

O = C + I + G + X

Output = consumption + investment + government expenditure + exports

Your output is a product or service. 

You cannot earn an income unless you produce an output.

To earn Y (income), you must sell a factor of production (resource), which will produce a financial

return. 

Factor of Production (resource)	Financial return (income)
Sell Land	rent
Sell Labour	wages/salary
Capital	interest
Enterprise (Combining the other factors of production to make goods and services.)	Profit – Entrepreneur

The characteristics of money ? 

• Divisible
• Portable
• Durable
• Scarce
• Recognisable
• Acceptable

The functions of money ?

• Medium of exchange
• Store of value
• Means of deferred payment
• Measure of value

Textbook Notes

Economics is the study of how scarce resources are allocated to satisfy the unlimited needs and wants of society.

The economic problem arises in society because the resources (factors of production) of land, labour, capital, and enterprise are scarce in relation to society’s needs and wants. As a result of this scarcity of resources, choices have to be made about how these scarce resources are allocated in the production of goods and services to satisfy society’s needs and wants.

The major economic decisions made by society are: 

• what to produce
• how much to produce
• how to produce and
• to whom to distribute production and income

The satisfaction of people’s needs and wants involves the principle of opportunity cost which means that the use of resources always involves an opportunity foregone in using the resources for some other activity or purpose.

Economics has two broad branches:

• Microeconomics: deals with individual economic behaviour and the operation of markets.
• Macroeconomics: the study of aggregate economic behaviour or activity in the economy as a whole.

 

The Economic Problem

The economic problem arises because the supply of resources (e.g. land, labour, capital, enterprise) is finite or limited in relation to the demand or wants of individuals.

The economics problem involves decision making about production, resource allocated and distribution. It involves answering these four questions:

• What to produce?
• How much to produce?
• How to produce?
• To whom to distribute?

Wants

Wants are the desires of individuals, communities and countries for goods and services that will satisfy these desires. Wants can be classified as:

• Basic wants: needs that all individuals must satisfy to some degree to survive, such as food, water, clothing and shelter.
• Recurring wants: wants that must be continually satisfied (such as food or water) so that people can physically survive.
• Substitute wants: wants that are interchangeable, such as a consumer wanting to buy a second hand car instead of a new car because it is within the consumer’s budget or income.
• Luxury wants: the desires for goods and services which satisfy needs in excess of basic goods and services needed for survival. E.g. holidays, computers, cars, entertainment.