Chap01 - What Economics Is About

CHAPTER ONE INTRODUCTION
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copied, scanned, or duplicated, in whole or in part, except
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1.Introduction
• 1.1 Definitions of Economics
• 1.2 Economic Categories (Opportunity Cost, Scarcity, and
Choices)
• 1.3 Production Possibilities Frontier / Curve
• Scope of Economics
(a) Microeconomics
(b) Macroeconomics
(c) Normative
(d) Positive
• 1.4 Basic Questions / Problems of Economics
• 1.5 Economic Systems
Definition of Economics
Economics is the social science that analyzes the production,
distribution and consumption of goods & services with
limited resources
Building A Definition of Economics
~ Goods and Bads ~
 Good - Anything from which individuals receive utility or
satisfaction
 Utility - The satisfaction one receives from a good
 Bad - Anything from which individuals receive disutility or
dissatisfaction
 Disutility - The dissatisfaction one receives from a bad
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~ Resources ~
Land - All natural

resources, such as
minerals, forests,
water, and
unimproved land
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~ Resources ~
Labor - The
physical and mental
talents people
contribute to the
production process
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~ Resources ~
Capital - Produced
goods that can be used
as inputs for further
production, such as
factories, machinery,
tools, computers, and
buildings
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~ Resources ~
Entrepreneurship - The particular talent that some

people have for:
organizing the resources of land, labor, and
capital to produce goods
seeking new business opportunities
developing new ways of doing things
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2.0 Economic Concepts
Scarcity
The condition in which our
wants are greater than the
limited resources available to
satisfy those wants
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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.
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Second Economic Concept (Opportunity
Costs)
 The most highly valued opportunity

or alternative forfeited when a
choice is made.
 Economists believe that a change in
opportunity cost can change a
person’s behavior.
 The higher the opportunity cost of
doing something, the less likely it
will be done.
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Ceteris Paribus and Theory
1. Ceteris Paribus = All other things being equal / all other
things held constant
2. Theory is a generalized explanation of how nature works.
Scarcity’s Effects
1. The Need to Make

Choices
2. The Need for a
Rationing Device
3. Competition
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Rationing Device
A rationing device is a means of

deciding who gets what of
available resources and goods.
An example of a rationing
device would be the ‘dollar
price’. The people who pay the
dollar price for a new car end
up with one
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Scarcity, Choice and Opportunity Costs
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Efficiency
Marginal Benefits = Marginal Costs
Decisions at the Margin
Decision making characterized by

weighing the additional (marginal)
benefits of a change against the
additional (marginal) costs of a change
with respect to current conditions
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1.3 Production Possibilities Frontier
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.
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Production Possibilities Frontier
Constant Opportunity Costs
 The economy can produce
any of the five combinations
of books and shirts in part
(a).
 We have plotted these
combinations in part (b). The
production possibilities
frontier (PPF) in part (b) is a
straight line because the
opportunity cost of
producing either good is
constant.
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Production Possibilities Frontier
Increasing Opportunity Costs
The economy can produce any of

the five combinations of cell
phones and coffee makers in part
(a).
We have plotted these
combinations in part (b).
The production possibilities
frontier in part (b) is bowed
outward because the opportunity
cost of producing coffee makers
increases as more coffee makers
are produced.
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Law of Increasing Opportunity Costs
As more of a good is
produced, the
opportunity costs of
producing that
good increase
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Increasing Opportunity Costs
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Production Possibility Frontier
Framework for Understanding
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Attainable and Unattainable Regions
and Productive Efficiency
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The PPF and Various Economic Concepts I
(1) Scarcity is illustrated by the

frontier itself. Implicit in the concept
of scarcity is the idea that we can
have some things but not all things.
The PPF separates an attainable
region from an unattainable region.
(2) Choice is represented by our
having to decide among the many
attainable combinations of the two
goods. For example, will we choose
the combination of goods
represented by point A or by point
B?
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The PPF and various Economic Concepts II
(3) Opportunity cost is most

easily seen as movement from one
point to another, such as movement
from point A to point B. More cars
are available at point B than at point
A, but fewer television sets are
available. In short, the opportunity
cost of more cars is fewer television
sets.
(4) Productive efficiency is
represented by the points on the
PPF (such as AE), while productive
inefficiency is represented by any
point below the PPF (such as F ).
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The PPF and various Economic Concepts
III
(5) Unemployment (in terms of

resources being unemployed)
exists at any productive
inefficient point (such as F ),
whereas resources are fully
employed at any productive
efficient point (such as AE).
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Economic Categories
Microeconomics
Microeconomics deals with human

behavior and choices as they relate to
relatively small units—an individual, a
business firm, an industry, a single market.
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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?
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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.
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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?
 What might cause interest rates to be low one year and
high the next?
 How do changes in the money supply affect the economy?
 How do changes in government spending and taxes affect
the economy?
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Economic Categories
Positive vs. Normative Economics
Positive - The study of “what is” in economic matters.
Cause Effect
Normative - The study of “what should be” in economic

matters
Judgment and Opinion
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1.4 Basic Questions of Economics
• What goods will be produced? – Depends on the consumers
and capability to produce (Technology, innovation and ideas)
• How will the goods be produced? – Production
• How much to produce? – Depends on capability to produce
• For whom the goods be produced? -- consumer
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Reserved. May not be scanned, copied or
duplicated, or posted to a publicly
accessible website, in whole or in part.
1.5 Economic Systems
Economic System is a set of institutions, acts of parliaments,
laws and rules that govern the use of resources and the
distribution of goods and services (Prof., Due)
• The economic system is composed of people, institutions
and their relationships. It addresses the problems of
economics like the allocation of the resources.

Capitalists
•Capitalism is an economic system in which the means of
production are privately owned and operated for profit, usually
in competitive markets.
•In other words; An economic system in which investment in
and ownership of the means of production, distribution, and
exchange of wealth is made and maintained chiefly by private
individuals or corporations.

Socialist
• Socialism is a term applied to an economic system in which
property is held in common and not individually, and
relationships are governed by a political hierarchy. Common
ownership doesn't mean decisions are made collectively,
however. Instead, individuals in positions of authority make
decisions in the name of the collective group.
• Socialists argue that socialism would allow for wealth to be
distributed based on how much one contributes to society,
as opposed to how much capital one holds.
• A primary goal of socialism is social equality and
a distribution of wealth based on one’s contribution to
society and an economic arrangement that would serve the
interests of society as a whole.

• Difference between socialism and communism is that
communists directly oppose the concept of capitalism, an
economic system in which production is controlled by
private interests. Socialists, on the other hand, believe
socialism can exist within a capitalist society.

Mix Economic Systems
• Any economy in which private corporate enterprises and public sector
enterprises exist side-by-side, and decisions taken through market
mechanism are supplemented by some form of partial planning, is to be
described as a mixed economy.
• This system overcomes the disadvantages of both the market and planned
economic systems.
• Provides a clear demarcation of the boundaries of public sector and
private sector so that the core sector and strategic sectors are invariably
in the public sector.
• The government intervenes to prevent undue concentration of economic
power, and monopolistic and restrictive trade practices
• The rights of the individual are respected and protected subject only to
the requirements of public law and order and morality


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CHAPTER ONE INTRODUCTION

© 2014 Cengage Learning. All Rights Reserved. May not be

Land - All natural

Entrepreneurship - The particular talent that some

 The most highly valued opportunity

1. The Need to Make

A rationing device is a means of

Decision making characterized by

Represents the possible combinations

Click for Tutorial

The economy can produce any of

(1) Scarcity is illustrated by the

(3) Opportunity cost is most

(5) Unemployment (in terms of

Microeconomics deals with human

Macroeconomics deals with human

Normative - The study of “what should be” in economic

© 2011 Cengage Learning. All Rights

© 2011 Cengage Learning. All Rights

© 2011 Cengage Learning. All Rights

© 2011 Cengage Learning. All Rights

© 2011 Cengage Learning. All Rights

© 2011 Cengage Learning. All Rights

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