Introduction to Economics

Economists can't run controlled lab experiments on a whole economy, so they build models — simplified representations of reality resting on stated assumptions. Ceteris paribus ('all other things held constant') lets you isolate one variable at a time, like asking what happens to quantity demanded when price alone changes. The rational agent assumption (firms maximise profit, consumers maximise utility) is a simplifying device, not a claim people never err — models are judged by usefulness, not photographic accuracy.

Positive statements describe what IS the case and can be tested against evidence, such as measuring unemployment or output. Normative statements involve a value judgement about what SHOULD happen — fair, best, too high, ought — and can't be settled by data alone. Most real policy debates blend both: a minimum wage rise has measurable positive effects on employment, plus a normative question of whether that trade-off is fair.

The fundamental economic problem is that human wants are unlimited but resources are scarce, so every choice forgoes an alternative — that forgone alternative is the opportunity cost. Four factors of production combine to create output: land, labour, capital and enterprise (the organiser who bears risk and earns profit). Every economy must decide what, how and for whom to produce, and the answer depends on its economic system: market (price mechanism decides), planned (central authority decides), or mixed (a blend, where every real economy actually sits).

The PPC models scarcity and choice for an economy producing two goods: points ON the curve are productively efficient, points INSIDE show unemployed resources, and points OUTSIDE are currently unattainable. The curve is bowed outward because resources aren't perfectly substitutable between the two goods, so opportunity cost rises the further production is pushed toward one good — the law of increasing opportunity cost. Opportunity cost between two points equals the magnitude of the gradient, $\left|\frac{\Delta Y}{\Delta X}\right|$, so always convert to a per-unit ratio before comparing unequal intervals.

Trade protectionism is any government policy favouring domestic producers over foreign competitors, often justified by infant-industry, jobs, security or trade-deficit arguments — but most tools create a net welfare loss. A tariff (tax on imports) raises domestic price and output plus generates government revenue, but shrinks consumer surplus by more than producers and government gain combined. An import quota caps the physical quantity imported with similar price effects, but the government earns no automatic revenue — the 'quota rent' goes to whoever holds the import licence unless licences are auctioned. Subsidies pay domestic producers per unit, lowering their effective costs so they can compete with cheaper imports.