Economics: An Introduction

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different groups. (Paul Samuelson)

Basic Concepts
Macroeconomics - the field of economics that deals with the study of why the aggregate rate of utilization of resources in the economy varies over time and its constituent problems: specifically unemployment, inflation and economic growth.. Microeconomics - the field of economics that deals with individual decision-makers, particularly consumers and firms, and their responses to changes in laws, the invention of new technologies and changes in the availability of resources. Scarcity - in the economic sense, refers to the basic fact of life that there exists only a finite amount of human and non-human resources, which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. Pitfalls in Economic reasoning: Failure to keep "Other things equal" .. (Cateris Paribus) -- The multi-variate (meaning, many variables) nature of economic realities may indeed make it difficult for us to comprehend, yet to experiment upon these to understand it further requires us to isolate a variable and see how it affects the whole. This variable should have levels or degrees of distinction. The doctrine of cateris paribus "All other things remaining the same" , is therefore an essential foundation in economic reasoning. Post hoc Fallacy -- to conclude that some event A caused a later event B just because that A was observed before B occurred. (e.g. concluding that the common cold is caused by the weather turning colder.) Fallacy of composition -- what is true for the part is true for the whole. Subjectivity -- the distinction between the observer and the observed, and how different observing points vary the way an object is perceived, and thought about. This is a major reason why interpretation disagreements occur, though it is not the only one. Though this is not necessarily a pitfall in reasoning, we also cannot be without it. Economics is used in understanding our personal consumer lives, in commercial decisionmaking, in understanding society, and in governing society. This understanding is the basis for better decision-making on both micro- and macro- levels. Positive vs Normative Economics -- Positive economics describes the facts and behavior of the economy, usually in indisputable quantities and figures (e.g. what percentage of the population is earns below P 36,000 a year ? ). Normative economics involves ethics and value judgements, of how things should be. Normative economics deals with questions that are resolved by political decisions, and not by economic science. Factors of Production -- resources used to produce goods and services to satisfy wants. Usually easily recalled as inputs. (Ex) land, labor and capital.

ECONOMY lecture notes: Introductory Concepts p 1 of 2

Production Possibility Frontier -- the limits on a graph that shows which alternative combination of commodities can just be obtained if all available productive resources are used. It distinguishes between attainable and unobtainable combinations. Each table uses 4 board ft of wood, while each chair uses 2 board ft. If an imaginary island economy only has a total of 320 board ft of wood, show the production possibility frontier on a 2-D graph Possibility A B C D E
Tables 80 60 40 20 0 0 40 80 120 160 Chairs

Tables 80 60 40 20 0

Chairs 0 40 80 120 160

Opportunity Cost -- synonymous with cost. The highest valued option that is forgone when an action or decision is undertaken. In the island economy shown in the graph above, if the decision was made to produce 30 tables and 60 chairs, there would be an amount of wood that is not used. (80 board ft ) 1. Suppose (a) that the economy can absorb all possible amount of wood if it has been turned into either tables or chairs, and (b) that any wood that was not used to make tables and chairs are discarded and are completely worthless.

From an economic point of view, the complete utilization value of 320 board ft of wood was not realized, and the opportunity cost is 320 board ft. To economists, cost is always what a person (or island economy) must give up or forgo, in order to consume something or pursue some activity The cost of any activity is the highest valued opportunity that one forgoes when he or she pursues that activity. In the same way, the cost of producing 30 tables and 60 chairs is not the usage of 240 board ft., with the windfall excess of 80 wood units, it is the production possibilities of 320 units that the island economy could have consumed if the decision was made to produce at the production possibility frontier. Cost means alternative cost.

Then :

Total available less Total used = = 320 - [30(4) + 60 (2)] = 320 240 = 80 board ft.

ECONOMY lecture notes: Introductory Concepts p 2 of 2