UNIT-1

CENTRAL PROBLEMS OF ECONOMY

Chapter Focus
The economic problem the problem of

having needs and unlimited wants, but limited resources that underlies the definition of
economics The types of reasoning and investigative methods that economists use The production choices an entire economy faces The three basic economic questions and how

various economic systems answer them

The main economic goals of Canadian economy and the ways in which they are related

The Economic Problem

Needs the essentials of life, such as food and shelter Wants desires for non-essential items Economic Problem the problem of having unlimited wants, but limited resources to satisfy them Scarcity the limited nature of resources, which underlies the basic economic problem Economic Resources basic items that are used in all types of production, including natural, capital, and human resources

 Natural Resources the resources from nature that are used in production, including land, raw materials, and natural process Capital Resources the processed materials, equipment, and buildings used in production; also known as capital Human Resources the efforts of people involved in production, including labour and entrepreneurship Economics the study of how to distribute scarce resources among alternative ends

 Microeconomics the branch of economics that focuses on the behaviour of individual participation in various market Macroeconomics the branch of economics that takes a wide-ranging view of the economy, studying the behaviour of economic sectors Economic models generalizations about or simplifications of economic reality; also know as laws, principles, or theories Hypothesis a tentative principle of an observation or insight, to be tested for its validity

 Variables factors that have measurable values Independent variables the variable in a causal relationship that causes change in another variable Dependent variables the variable in a causal relationship that is affected by another variable Inverse relationship a relationship in which a change in the independent variable causes a change in the opposite direction of the dependent variable Direct relationship a relationship in which a change in the independent variable causes a change in the same direction of the dependent variable

 Ceteris Paribus the assumption that all other things remain the same Division of labour the extent to which jobs of different workers are specialized into separate task Deduction a type of reasoning in which one states a hypothesis before examining the facts Induction a type of reasoning in which one states a hypothesis after examining the facts Positive economics the study of economic facts and how the economy operates as it does Normative economics the study of how the economy ought to operate

Economic Choice
Utility the satisfaction gained from any action Self-interest motive the assumption that people act to maximize their own welfare Opportunity Cost the utility that could have been gained by choosing an actions best alternative Free Goods items that are so plentiful that they do not have any cost Economic value the opportunity cost of product

The Production Possibilities Model

Consumer product an item that gratifies peoples needs and wants Capital good an item that is used to produce other products Production Possibilities Schedule a table that shows the possible output combinations for an economy Production possibilities curve a graph that shows the possible output combinations for an economy

Economic Systems
Basic economic questions
What to produce? How to produce? For whom to produce?

Economic system - the organization of an economy, which represents a countrys distinct set of social customs, political institutions, and economic practices Traditional economy an economic system in which economic decisions are made on the basis of custom Market economy an economic system based on private ownership and the use of markets in economic decision-making

 Command economy an economic system based on public ownership and central planning Modern mixed economy an economic system that combines aspects of a market economy and a command economy
Production decisions are made in both private market and by government

Traditional mixed economies economic systems in which a traditional sector co-exists with modern sectors Laissez faire the principle that governments benefit society the most by not interfering in economic activity Market a set of arrangements between buyers and sellers of a certain item

 Product markets markets in which consumer, or final, products are trade Resource markets markets in which economic resources are traded Circular flows the circulation of money and the circulation of consumer products and economic resources in the economy Consumer sovereignty the effect of consumer needs and wants on production decisions Invisible hand the tendency for competitive markets to turn self-interested behaviour into socially beneficial activity Private sector the part of an economy in which private markets dominate

 Public sector the part of an economy in which governments dominate Traditional sector the part of an economy in which custom and traditional production techniques dominate

Economic Goals
Economic Efficiency Income Equity Price Stability Full Employment Viable Balance of Payments Economic Growth Environmental Sustainability