Managerial Economics

Lecture 1
Basic Concepts
in Economics
 What is Economics?

 Economics is the science of scarcity.

 Economics is the study of Choices
 Since we are unable to have everything we desire, we must
make choices on how we will use our resources.
 In other word Economics is the science that deals with the
allocation, or use, of scarce resources for the purpose of
fulfilling society’s needs and wants

Lecture 1 Basic Concepts in Economics

Why Study Economics

Lecture 1 Basic Concepts in Economics

 To achieve social change
 You’ll gain tools to understand origins of social problems and
design more effective solutions
 To help prepare for other careers
 You’ll discover that a wide range of careers deal with
economic issues on many levels
 To become an economist
 You’ll begin to develop a body of knowledge that could lead
you to become an economist in the future
Goods and Services

Lecture 1 Basic Concepts in Economics

 Goods
 Stuff.
 Services
 Things people do for others.
Scarcity

Lecture 1 Basic Concepts in Economics

 Meaning: Resources are insufficient to satisfy ALL human
wants

 A relative concept: we want more than we have

 Basic economic problem in human societies

Scarcity

 Definition

 Scarcity is the condition in which our wants

are greater than our limited resources.

A situation in which the amount of something

actually available would not be sufficient to
satisfy the desire for it, if it were provided free
of charge.

Lecture 1 Basic Concepts in Economics

Is sea water scarce?

Lecture 1 Basic Concepts in Economics

 Is it fixed in supply?

 Do we want more sea water than we have?

 Sea water is not scarce

Shortage

Lecture 1 Basic Concepts in Economics

 When there isn’t enough stuff.
 Not enough of a product can be supplied or it won’t be supplied. At
least not at current prices.

 If prices go up, it may become profitable for somebody to provide the

good or service and that will eliminate the shortage.
Resources

Lecture 1 Basic Concepts in Economics

 used to produce goods / services to satisfy human wants

 limited in supply

 scarce: i.e. their quantities are insufficient to satisfy all

human wants
Types of resources

Lecture 1 Basic Concepts in Economics

 Natural resources: e.g. sunshine, rain, crude oil

 Human resources: labour service

 Man made resources: e.g. machines, equipments

WEALTH.
All material things produced by labor for the satisfaction of human desires and
having exchange value.
 This means that wealth must have all of these characteristics:
 Wealth is material. Human qualities such as skill and mental acumen are not
material, hence cannot be classified as wealth.
 Wealth is produced by labor. Land possesses all the essentials of wealth but
one — it is not a product of labor, therefore it is not wealth.
 Wealth is capable of satisfying human desire. Money is not wealth; it is a
medium of exchange whereby wealth can be acquired. Nor are shares of stock,
bonds or other securities classifiable as wealth. They are but the evidences of
ownership. None of these satisfy desire directly; if they are destroyed, the sum
total of wealth is not decreased.
 Wealth has exchange value. (More on this in a moment.)

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The Three Economic Questions

1. What goods and services should be produced?

2. How should these goods and services be
produced?
3. Who consumes these goods and services?

The way these questions are answered

determines the economic system
An economic system is the method used by a society to
produce and distribute goods and services.
Lecture 1 Basic Concepts in Economics 12
Microeconomics

 Micro
 Micro comes from Greek word mikros, meaning “small”
 Microeconomics
 Study of behavior of individual households, firms, and
governments
 Choices they make
 Interaction in specific markets

 Focuses on individual parts of an

economy, rather than the whole

Lecture 1 Basic Concepts in Economics

Macroeconomics

Lecture 1 Basic Concepts in Economics

 Macro
 Macro comes from Greek word, makros, meaning “large”
 Macroeconomics
 Study of the economy as a whole
 Focuses on big picture and ignores fine details
Micro vs. Macro

Lecture 1 Basic Concepts in Economics

MICRO economics
Study of small economic units such as
individuals, firms, and industries (competitive
markets, labor markets, personal decision
making, etc.)

MACRO economics
Study of the large economy as a whole or in its
basic subdivisions (National Economic Growth,
Government Spending, Inflation, Unemployment,
etc.)
Thinking at the Margin

# Times Benefit Cost

Watching Movie

1st $30 $10

2nd $15 $10
3rd $5 $10
Total $50 $30
Would you see the movie three times?
Notice that the total benefit is more than the total
cost but you would NOT watch the movie the 3rd
time.
Marginal Analysis
In economics the term marginal = additional

Lecture 1 Basic Concepts in Economics

“Thinking on the margin”, or MARGINAL
ANALYSIS involves making decisions based on the
additional benefit vs. the additional cost.

For Example:
You have been shopping at the mall for a half hour, the additional
benefit of shopping for an additional half-hour might outweigh the
additional cost (the opportunity cost).
After three hours, the additional benefit from staying an additional
half-hour would likely be less than the additional cost.
5 Key Economic Assumptions

Lecture 1 Basic Concepts in Economics

1. Society’s wants are unlimited, but ALL resources are
limited (scarcity).
2. Due to scarcity, choices must be made. Every choice
has a cost (a trade-off).
3. Everyone’s goal is to make choices that maximize their
satisfaction. Everyone acts in their own “self-interest.”
4. Everyone acts rationally by comparing the marginal
costs and marginal benefits of every choice
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
 Lecture 1 Basic Concepts in Economics
The Factors of Production
Opportunity Cost

 The true cost of choosing one alternative

over the other.
 Trade offs – giving up one thing in order to obtain another.
 The one that you give up when the choice
is made.
 Give an example of a time when you had to make an
economic choice. What was the opportunity cost?
 “Opportunity cost is the opportunity lost”
 Per Unit Opportunity Cost Review

Per Unit Opportunity Cost = Opportunity Cost

Units Gained
Assume it costs you $50 to produce 5 t-shirts. What is your
PER UNIT cost for each shirt?
$10 per shirt

Now, take money our of the equation. Instead of producing

5 shirts you could have made 10 hats.

1. What is your PER UNIT OPPORTUNITY COST for

each shirt in terms of hats given up?
1 shirt costs 2 hats

2. What is your PER UNIT OPPORTUNITY COST for

each hat in terms of shirts given up?
1 hat costs a half of a shirt
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Making Economic Decisions

Options Benefit Opportunity Cost

0 hours studying, F on Test None
3 hours sleeping
1 hours studying, C on Test 1 hour of sleep
2 hours sleeping
2 hours studying, B on Test 2 hours of sleep
1 hour sleeping

3 hours studying B+ on Test 3 hours of sleep

Lecture 1 Basic Concepts in Economics

 next question …

 5. What is the difference between a shortage and scarcity?

 a. A shortage can be temporary or long-term, but scarcity always exists.
 b. A shortage results from rising prices; scarcity results from falling prices.
 c. A shortage is a lack of all goods and services; scarcity concerns a single
item.
 d. There is no real difference between a shortage and scarcity

Lecture 1 Basic Concepts in Economics

Answer is …

 a. A shortage can be temporary or long-term, but scarcity always

exists

Lecture 1 Basic Concepts in

Economics
next….

 6. What does an economist mean by the term LAND?

 a. farmland only
 b. food crops grown on farmland as well as the farmland itself
 c. goods and services that are produced form the land
 d. all natural resources used to produce goods and services

Lecture 1 Basic Concepts in Economics

answer …

Lecture 1 Basic Concepts in Economics

 d. all natural resources used to produce goods and
services
Lecture 1 Basic Concepts in Economics
Thanks For your attention