Basic Economic Ideas & Resource Allocation

Ø Key Definitions:

Economics : The study of how individuals and society make decisions about how to use scarce resources to satisfy unlimited material wants.

Scarcity : The condition that exists when there are not enough resources to satisfy all the wants of individuals or society.

Choices : The decisions individuals and society make about the use of scarce resources.

Ø Define opportunity costs:

 The next highest valued alternative that is given up when a choice is made.Having to select one option involves an opportunity cost. Opportunity cost is the best alternative forgone. Due to the economic problem of wants exceeding resources, economies have to decide what to produce, how to produce it and who will receive what is produced. What to produce, how to produce and who will receive what is produced are sometimes referred to as the three basic questions which all economies have to answer.

Ø What do you mean by ‘Ceteris paribus’ ?:

Ceteris paribus means other things being equal. Economists often make use of ceteris paribus to consider the possible effects of a change in one variable on another variable. For instance, an increase in real disposable income would be expected to lead to an increase in demand for gold watches, on the assumption that the other infl uences on demand for gold watches are not changing

Ø Positive and normative statements :

A positive statement is a statement of fact. It can be tested to assess whether it is right or wrong. A normative statement is a statement based on opinion. It is a value judgement and, as such, cannot be proved right or wrong. There are both positive and normative statements in economics. ‘The unemployment rate in a country is 6%’ is a positive statement. In contrast, ‘the government’s key priority should be reducing unemployment’ is a normative statement.

Ø Positive and normative economics :

Positive economics (as opposed to normative economics) is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories.

Normative economics (as opposed to positiveeconomics) is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.