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÷ 

 
` To introduce major economic theories and discuss their
application to examine how an organization can achieve
its objectives more efficiently
3 

 
` Jnalysis of market (demand, supply and elasticity)

` Jnalysis of production and cost

` Jnalysis of market structure

½  

 

` J household and an economy
face many decisions:
` Who will work?
` What goods and how many of them should be produced?
` What resources should be used in production?
` Jt what price should the goods be sold?
½  

 

` ociety and scarce resources:
` The management of society·s resources is important because
resources are scarce.
` Scarcity means that society has limited resources and therefore
cannot produce all the goods and services people want.

` ^conomics is the study of how society manages its scarce

resources.
½  

 

` uow people make decisions.

1. People face trade-offs.

2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives
½  

 

` uow people interact with each other

5. Trade can make everyone better off.

6. Markets are usually a good way to organise economic activity.
7. Governments can sometimes improve market outcomes.
½  

 

` uow the economy as a whole works.

8. J country·s standard of living depends on its ability to

produce goods and services.
9. Prices rise when the government prints too much money.
10. ociety faces a short-term trade-off between inflation and
unemployment.
      
 
` ^conomics trains you to «
` Think in terms of alternatives.
` ^valuate the cost of individual and social choices.
` ^xamine and understand how certain events and issues are
related.

` The economic way of thinking «

` involves thinking analytically and objectively
` makes use of the scientific method
J   
` ^conomists make assumptions in order to make the world
easier to understand.
` The art in scientific thinking is deciding which assumptions to
make.
` ^conomists use different assumptions to answer different
questions.
^


` ^conomists use models to simplify reality in order to improve
our understanding of the world.

` Two of the most basic economic models include:

` The circular-flow diagram
` The production possibilities frontier
÷ 
  
` The circular-flow diagram is a visual model of the economy
that shows how dollars flow through markets among
households and firms.
 

  
MARKETS
Revenue FOR Spending
GOODS AND SERVICES
Goods ‡Firms sell Goods and
and services ‡Households buy services
sold bought

FIRMS HOUSEHOLDS
‡Produce and sell ‡Buy and consume
goods and services goods and services
‡Hire and use factors ‡Own and sell factors
of production of production

Factors of MARKETS Labour, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, ‡Households sell Income
and profit ‡Firms buy
= Flow of inputs
and outputs
= Flow of dollars

13
÷
 
 
3 
    
` The £roduction £ossibilities Frontier (PPF) is a graph that shows
the various combinations of output that the economy can
possibly produce given the available factors of production and
the available production technology.

14
  
 
   
 

 

    

3,000 D

C
2,200
2,000 A
Production
possibilities
frontier
1,000 B

0 300 600 700 1,000  

15

 
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` |icroeconomics focuses on the individual parts of the economy.
` uow households and firms make decisions and how they interact
in specific markets.

` |acroeconomics looks at the economy as a whole.

` ^conomy-wide phenomena, including inflation, unemployment and
economic growth.

16
  
   
  
` When economists are trying to explain the world, they are
scientists.

` When economists are trying to improve the world, they are

policy advisers.

17
       
` £ositive statements are claims that attempt to describe the
world as it is.
` ÷alled descriptive analysis.

` ormative statements are claims that attempt to describe how

the world should be.
` ÷alled prescriptive analysis.

18
½  
   
` They may disagree about the validity of alternative positive
theories about how the world works.

` They may have different values and, therefore, different

normative views about what policies should try to accomplish.

19
    




` The theory of consumer choice addresses the following

questions:

` Do all demand curves slope downwards?

` uow do wages affect labour supply?
` uow do interest rates affect household saving?
` Do the poor prefer to receive cash or
in-kind transfers?

20
 

  ½   


 
` The budget constraint depicts the limit on the consumption
¶bundles· that a consumer can afford.
` People consume less than they desire because their spending is
constrained, or limited, by their income.

` It shows the various combinations of goods the consumer can

afford given his or her income and the prices of the two
goods.

21
  


 

 

B
500

Consumer¶s
budget constraint

A
22 0 100 


÷ 
 ½   

 
` J consumer·s preference among consumption bundles may be
illustrated with indifference curves.

` Jn indifference curve is a curve that shows consumption

bundles that give the consumer the same level of satisfaction.

23
 
 


 


B D
X2
Indifference
A
curve, X1
0 


24
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ÿ  
    


 

` The slope at any point on an indifference curve is the

marginal rate of substitution.
` It is the rate at which a consumer is willing to trade one
good for another.
` It is the amount of one good that a consumer requires as
compensation to give up one unit of the other good.

25
 
 


 


B D

 X2
1
Indifference
A
curve, X1
0 


26
÷

 
     

 
1. uigher indifference curves are preferred to lower ones.
2. Indifference curves are
downward-sloping.
3. Indifference curves do not cross.
4. Indifference curves are bowed inwards.

27
      

      


 


B D
X2
Indifference
A
curve, X1
0 


28
÷

 
   

    


 


Indifference
curve, X1

0 


29
÷

 
 !  

   



 


0 


30
÷

 
 "  

  
 


 


14

 = 6

A
8
1

4 B

 = 1
3
1
Indifference
curve

0 2 3 6 7 


31
÷

 
 
  


` ÷onsumers want to get the combination of goods on the highest
possible indifference curve.
` uowever, the consumer must also end up on or below her budget
constraint.
` ÷ombining the indifference curve and the budget constraint
determines the consumer·s optimum choice.
` ÷onsumer optimum occurs at the point where the highest
indifference curve and the budget constraint are tangent.

32
 
  

 


Optimum

B
A

X3
X2
X1

Budget constraint
0 


33
÷

 

  
 
 




` Jn increase in income shifts the budget constraint outward.
` The consumer is able to choose a better combination of goods
on a higher indifference curve.

34
 J 
  


 
 New budget constraint

1. An increase in income shifts the

budget constraint outward ...

New optimum

3. ... and
Pepsi
consumption. Initial
optimum X2

Initial
budget
X1
constraint

0 


2. ... raising pizza consumption ...

35
÷

 

  
 





` J fall in the price of any good rotates the budget constraint
outward and changes the slope of the budget constraint.

36
 J
  


 


New budget constraint

1,000 D

New optimum
B 1. A fall in the price of Pepsi rotates
500
the budget constraint outward ...
3. ... and
raising Pepsi Initial optimum
consumption.
Initial X2
budget X1
constraint A
0 100 


2. . . . reducing pizza consumption ...
37
÷

 
â    
 
` J consumer·s demand curve can be viewed as a summary of
the optimal decisions that arise from his or her budget
constraint and indifference curves.

38
 â    
 

!"  #
 !$"%  


  
 
 New budget constraint 


B A
750 $2

X2
B
1
A
250 Demand
X1

0 Initial budget  0 250 750 

constraint 
  


39
÷