Basic Economic

Terms-1

ECON 250 MODERN WORLD ECONOMY

Definition of Economics

We want more than we can get.

Inability to satisfy all wants is called scarcity.

Because of scarcity, we must make choices.

Our choices depend on incentives we face.

An incentive is a reward that encourages an
action or a penalty that discourages an action.

ECON 250 MODERN WORLD ECONOMY

Definition of Economics

Economics is the social science that studies

the choices that individuals, businesses,
governments and entire societies make as
they cope with scarcity and the incentives that
influence and reconcile those choices.

ECON 250 MODERN WORLD ECONOMY

Definition of Economics

Microeconomics: is the study of choices that

individuals and businesses make, the way those
choices interact in markets and the influence of
governments.

Macroeconomics: is the study of performance

of the national and global economies.

ECON 250 MODERN WORLD ECONOMY

Economic Questions

What, How and For Whom?

Goods and services are objects people

value and produce to satisfy human wants.

What?
What we produce changes over time as
changes in technology allow us to produce
more.
ECON 250 MODERN WORLD ECONOMY
Economic Questions

How?

Goods and services are produced by using

productive resources that economists call
factors of production:
1. Land
2. Labour
3. Capital
4. Entrepreneurship
ECON 250 MODERN WORLD ECONOMY
“Gifts of nature” we use to produce are land.
 Work time and effort is labour.
 Human capital is the knowledge and skill
that people obtain from education, on-the-job
training and work experience.
Tools, instruments, machines, buildings and
other constructions used to produce goods and
services are capital.
Human resource that organizes land, labour
and capital is entrepreneurship.

ECON 250 MODERN WORLD ECONOMY

Economic Questions
For Whom?

Who gets the goods and services depends

on the incomes that people earn.

 Land earns rent.

 Labour earns wages.

 Capital earns interest.

 Entrepreneurship earns profit.
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The Economic Way of Thinking

Key terms of economic way of thinking:

 A choice is a trade-off.
 People make rational choices by comparing
benefits and costs.
 Benefit is what you gain from something.
 Cost is what you must give up to get
something.
ECON 250 MODERN WORLD ECONOMY
The Economic Way of Thinking

A Choice Is a Trade-off

On Saturday night, will you study or have fun?

You can’t study or have fun at the same time,
so you must make a choice.
Whatever you choose, you could have chosen
something else.
Your choice is a trade-off.
ECON 250 MODERN WORLD ECONOMY
The Economic Way of Thinking

A rational choice compares costs and benefits

and achieves the greatest benefit over cost.

What goods and services will be produced

and in what quantities?

The answer is: Those that people rationally

choose to buy!

ECON 250 MODERN WORLD ECONOMY

The Economic Way of Thinking

Opportunity cost is highest-valued

alternative that must be given up to get it.

Opportunity cost has two components:

1. The things you can’t afford to buy if you
purchase the concert ticket.
2. The things you can’t do with your time if you
spend at the concert.
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Economics: A Social Science

Economists distinguish between:

 What is – positive statements
 What ought to be – normative statements

A positive statement can be tested by

checking it against facts.
A normative statement expresses an opinion
and cannot be tested.

ECON 250 MODERN WORLD ECONOMY