Chapter 1: Introduction

Learning Outcomes
Define Economics.
Explain the different Economic categories.
List and describe the types of resources.

Explain key Economics concepts

Learning Outcomes
Define the production possibilities curve
(PPF).
Plot and explain the types of PPF.
Use the PPF to explain the seven basic

Economic concepts.

List and explain the three types of economic

system.

Building A Definition of Economics

~ Goods and Bads ~
Utility - The satisfaction one receives from
a good.
Disutility - The dissatisfaction one
receives from a bad.
Good - Anything that gives a person
utility or satisfaction (tangible or
intangible goods). i.e. Computer.
Bad Anything that gives a person
disutility or dissatisfaction. i.e. Flu.

Building A Definition of Economics

~ Resources ~
The production of all goods and services
requires the resources.
- Resources the input or factors of production.

Four (4) categories of resources:

1) Land.
2) Labour.
3) Capital.
4) Entrepreneurship.

Building A Definition of Economics

~ Resources ~
1) Land
- All natural resources, such as minerals,
forests, water, and unimproved land.
- i.e. oil, wood.
2) Labor
- The physical and mental talents people
contribute to the production process.
- i.e. a person building a house.

Building A Definition of Economics

~ Resources ~
3) Capital

- Produced goods that can be used as inputs for

further production.
- i.e. factories, machinery, tools, computers, and
buildings.

4) Entrepreneurship
- The particular talent that some people have for:
i) organizing the resources of land, labour and
capital to produce goods.
ii) seeking new business opportunities.
iii) developing new ways of doing things.

Economics, the Science of Scarcity

- The science of how individuals

and societies deal with the fact
that wants are greater than the
limited resources available to
satisfy those wants.

Key Concepts in Economic

Key concepts:
1) Scarcity
2) Opportunity cost.
3) Unintended effect.
4) Exchange/ trade.

Scarcity
The condition in which our wants are greater than
the limited resources (i.e. land, labour, time and etc)
available to satisfy those wants.
Scarcity is our infinite wants for goods hitting up
against finite resources
i.e. we want goods, but there are just not enough
resources available to provide us with all the goods
we wants.
Three (3) effects of scarcity:
1) the need to make choices.
2) the need for rationing device.
3) competition.

Scarcity
1) Choices
) People have to make choices because of
scarcity.
) We must choose which wants we will
satisfy and which we will not.
) i.e. Do I go to Bali for holiday? Or Do I
pay off my car loan earlier?

Scarcity
2) Rationing Device
A means for deciding who gets what of
available resources and goods.
3) Competition
Competition exists because of scarcity.
Because goods are limited, individuals
compete to obtain the goods that are
available, and studying this competitive
process is what an economist does.

Self Test Questions

1. Scarcity is the condition of finite
resources. True or false? Explain your
answer.
2. How does competition arise out of
scarcity?
3. How does choice arise out of scarcity?

Key Concepts in Economic

Opportunity cost

The most highly valued opportunity or

alternative forfeited when a choice is made.

The higher the opportunity cost of doing

something, the less likely it will be done.

i.e. The opportunity cost of reading the

chapter is the value of what is forgone this
might be measured in the lost income for a
student who could be working at a job, or a
lost hour of watching television or a forgone
nap.

Key Concepts in Economic

Exchange/Trade
The process of giving up one thing for
another.
People enter into
exchanges to make
themselves better
off.

Key Concepts in Economic

Economic Categories
Two (2) economic categories are:
1)Positive economics vs Normative
economics.
2)Microeconomics vs Macroeconomics.

Economic Categories
Positive vs. Normative Economics
1) Positive economics
) The study of what is in economic
matters.
) Deal with cause-effect relationships that
can be tested.
) i.e. What is the effect of a cut in income
taxes on unemployment rate?
Cause

Effect

Economic Categories
Positive vs. Normative Economics
2) Normative economics
The study of what should be in economic
matters.
Deal with value judgments and opinions
that cannot be tested.
i.e. The income taxes should be cut because
the income tax burden on many taxpayers is
currently high.
Judgment and Opinion

Economic Categories
Microeconomics
Microeconomics deals with human
behavior and choices as they relate to
relatively small unitsan individual,
a business firm, an industry, a single
market.

Economic Categories
Microeconomic Questions
~

How does a market work?

What level of output does a firm produce?
What price does a firm charge for the good it
produces?
How does a consumer determine how much of a
good he or she will buy?
Can government policy affect business behavior?
Can government policy affect consumer
behavior?

Economic Categories
Macroeconomics
Macroeconomics deals with human
behavior and choices as they relate to
highly aggregate markets (e.g., the
goods and services market) or the
entire economy.

Economic Categories
Macroeconomic Questions
How does the economy work?
Why is the unemployment rate
sometimes high and sometimes low?
What causes inflation?
Why do some national economies
grow faster than other national
economies?

Wall Street Journal

The Wall Street Journal is a is a rich source
of information which provides real life
examples of micro- and macro economic
activities. Check todays issue to see the
most current news.
http://www.wsj.com

Other Useful Sources of Current

Economic News

New York Times

http://www.nytimes.com/pages/business/index.html

Financial Times

http://www.ft.com/home/us

The Economist

http://www.economist.com/index.html

Economic Activities
Two (2) types of economic activities:
1)Producing.
- Production possibilities frontier (PPF).
2)Trading.
- Exchange and trade.

Economic Activities:
Production Possibilities Frontier
PPF:
Represents the possible combinations of two
goods that can be produced in a certain period
of time under the conditions of a given state
of technology and fully employed resources.

 Two (2) types of PPF:

1)The Straight Line PPF constant
opportunity costs.
2) The Concave downward PPF increasing
opportunity costs.

Production Possibilities Frontier

Constant Opportunity Costs

Opportunity costs of 1 TV = 1 computer.

Opp. Costs between TV and Computer is
constant.
i.e. Point A to B => 10k computers (from
50k to 40K)not produces but 10k TV set
are produce; ratio is 1:1.

Production Possibilities Frontier

Increasing Opportunity Costs

As more of one good is produced, the opp. costs

between computers and TV sets changes.

As the economy produces more TV sets, the
opp.
costs of producing TV sets increases.
i.e.
Point A to B => opp. cost of 1 TV = computers.
Point B to C => opp. costs of 1 TV = computers.

Production Possibilities Frontier

Law of Increasing Opportunity Costs
Law of Increasing Opportunity Costs
As more of a good is produced, the
opportunity costs of producing that
good increase.
must employ resources which are less
efficient and/ or appropriate when
increasing production.
In real world, most PPF lines are concave
downward.

Increasing Opportunity Costs

Production Possibility Frontier

Framework for Understanding

Production Possibility Frontier

Framework for Understanding
1) Scarcity
) Where wants (for goods) are greater than the
resources available to satisfy those wants.
) Scarcity implies that some things are attainable.
- Attainable
consists of the points on the PPF and all point
below PPF.
- i.e. Point A to point F.
- Unattainable
- consists of the point above and beyond the PPF.
- i.e. Point G.

Production Possibility Frontier

Framework for Understanding

Production Possibility Frontier

Framework for Understanding
2) Choice
Individuals must choose the combination of the
two goods they want to produce within the
attainable region.
i.e. Combination of point A or point B or point C.

3) Opportunity Costs
- The value of the best alternative forgone
when a choice is made.
Move from one point to another on the
PPF.
i.e. Point A to point B => Opp. Cost of 1
car = TV sets.

Production Possibility Frontier

Framework for Understanding
4) Productive Efficiency
The condition where the maximum output is
produced with given resources and technology.
Lie on PPF ( Point A B C D).

5) Productive Inefficiency
The condition where less than the
maximum output is produced with given
resources and technology.
Productive inefficiency implies that more
of one good can be produced without any
less of another good being produced.
Lie inside the PPF (Point F).

Production Possibility Frontier

Framework for Understanding
6) Unemployment
Resources are unemployed when it is not producing
the maximum output with the available resources
and technology (productive inefficiency).

7) Economic growth
An increase in resources (i.e. a new
discovery of resources) or an advance in
technology can increase the production
capabilities of an economy, leading to
economic growth and shift outward in
the production possibilities frontier.

Production Possibility Frontier

Framework for Understanding
Economic Growth: Advanced Technology
An advance in
technology
commonly refers to
the ability to produce
more output with a
fixed amount of
resources OR the
ability to produce the
same output with
fewer resources.

Economic Systems
Economic System: the way in which society
decides to answer key economic questionsin
particular those questions that relate to
production and trade.
There are hundreds of countries but only TWO
major economic systems.
We refer to these two major systems as
Socialism and Capitalism.
Most Countries have Chosen Elements from
BOTH economic systems.

Mixed Capitalist Economies

An economic system characterized by
largely private ownership of factors of
production, market allocation of
resources, and decentralized decision
making. Most activities take place in the
private sector in this system, but
government plays a substantial and
regulatory role.
The United States has a Mixed Capitalist
Economy.

Economic Systems and the PPF:

Who Decides Where the Economy Will Operate on the

PPF?

Capitalist:
The Market Decides
Socialist:
The Government
Decides

What Goods Will Be Produced?

This is really asking Where on the PPF
will an economy operate?
Capitalist: The Market will dictate what
goods will be produced.
Socialist: The Government will have a
large role in determining what will be
produced.

How Will The Goods Be Produced?

Capitalism: decided
by private producers.
Socialism:
government plays a
large part in deciding
what is produced.

For Whom Will The Goods Be

Produced?
Capitalism: goods will be produced for
those persons who are able and willing to
pay the prices for the goods.
Socialism: more government control over
who gets what goods.

Trade
Capitalism: both
parties benefit from the
trade.
Socialism: trade is
viewed as making one
person better off at the
expense of another
person.

Prices
Capitalist :
Prices ration goods and
services
Prices convey information
Prices serve as an incentive
to respond to information
Socialist :
Price is viewed as being set
by greedy businesses with
vast economic power