Introduction to

Economics
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 The Economic Problem

◆ Wants, desires: unlimited

◆ Resources: scarce
◆ Economic choice
◆ Economics
◆ How people use scarce resources to satisfy unlimited wants

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 Resources
◆ Inputs; factors of production
◆ Used to produce goods and services
◆ Goods and services are scarce because
resources are scarce
1. Labour
2. Capital
3. Natural Resources
4. Entrepreneurial ability
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 Resources
◆ Labour – human effort
◆ Physical effort
◆ Mental effort
◆ Time
◆ Payment: Wage
◆ Capital – human creations
◆ Physical capital
◆ Human capital
◆ Payment: Interest
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 Resources
◆ Natural resources – Gifts of nature
◆ Renewable
◆ Exhaustible
◆ Payment: Rent
◆ Entrepreneurial ability
◆ Talent, idea
◆ Risk of operation
◆ Payment: Profit 6
 Goods and Services

◆ Good: see, feel, touch

◆ Service: intangible
◆ Scarce good/service
◆ The amount people desire exceeds the amount available
◆ Choice
◆ Give up some goods and services

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 Goods and Services

◆ Bads
◆ We want none of them; not even at a zero price
◆ Free goods and services
◆ “There is no such thing as a free lunch”
◆ Involve a cost to someone

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Economic Decision Makers
◆ Households
◆ Consumers
◆ Demand goods and services
◆ Resource owners
◆ Supply resources
◆ Firms, Governments, Rest of the World
◆ Demand resources
◆ Produce goods and services 10
 Markets

◆ Bring together buyers and sellers

◆ Determine price and quantity
◆ Product markets
◆ Goods and services
◆ Resource markets
◆ Resources

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Competitive vs Non-competitive

❑ Numbers of Buyers (Consumers) and Sellers (Firms)

❑How Prices are Determined

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A Simple Circular-Flow Model
◆ Flow of
◆ Resources
◆ Products
◆ Income
◆ Revenue
◆ Among economic decision makers
◆ Interaction
◆ Households
◆ Firms 13
The Simple Circular-Flow
Model
for Households and Firms

Households
- Supply resources to resource market;
earn income
- Demand goods and services from
product market; spend income

Firms
- Demand resources to produce goods
and services; payment for resources
- Supply goods and services to product
market; earn revenue

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 Rational Self-Interest

◆ Individuals are rational

◆ Make the best choice
◆ Given the available information
◆ Maximize expected benefit
◆ With a given cost
◆ Minimize expected cost
◆ For a given benefit
◆ The lower the personal cost of helping others, the more help we offer
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Choice Requires Time and
Information

◆ Time and information – scarce; valuable

◆ Rational decision makers
◆ Willing to pay for information
◆ Improve choices
◆ Acquire information
◆ Additional benefit expected exceeds the additional
cost

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 Economic Analysis is Marginal
Analysis
◆ Expected marginal benefit
◆ Expected marginal cost
◆ Marginal
◆ Incremental, additional, extra
◆ Rational decision maker:
◆ Change the status quo if expected marginal benefit exceeds
expected marginal cost

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 Microeconomics and
Macroeconomics
◆ Microeconomics
◆ Individual economic choices
◆ Markets coordinate the choices of economic decision makers
◆ Individual pieces of the puzzle
◆ Macroeconomics
◆ Performance of the economy as a whole
◆ Big picture

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 Normative Versus Positive

◆ Positive economic statement

◆ Assertion about economic reality
◆ Supported or rejected by evidence
◆ True or false
◆ ‘What is’
◆ Normative economic statement
◆ Opinion
◆ ‘What should be’
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Questions??

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