Central Concepts of Economics

Why Study Economics?

-All your life, from cradle to grave and beyond, you will run up against the brutal truth of
economics.
 Scarcity and efficiency
 Scarcity: Scarcity refers to the gap between insufficient resources and the theoretic needs
people have for these resources.
 Demand-induced scarcity
 Supply-induced scarcity
 Structural scarcity
 Effects of scarcity: Famine, drought, or even war
 Efficiency: Efficiency denotes the most effective use of a society’s resources in satisfying
peoples wants and needs.
 The logic of economics: The economic life of an individual is complicated and
economists apply scientific approach to understand this complexity.
 Common fallacies in economic reasoning:
 The post-hoc fallacy – inference of causality
 Failure to hold other things constant
 Fallacy of composition
Three Problems of Economic Organization

 Indeed, these three fundamental questions of economic organization –what,

how, and for whom – are as crucial today as they were at the dawn of human
civilization:
 What commodities are produced and in what quantities?
 Rice or Fruits; Garments or Agriculture farming etc. and their respective proportion.
 How are goods produced?
 Electricity will be generated either by fuel, coal, sun, or from water? Human vs robots …
 For whom are goods produced?
 Who will enjoy the fruits of economic activity?
 How the income or resources will be distributed?
 What will be the strata of the social system?
The Three Forms of Economic System

 Market Economy: A market economy is one in which individuals and private

firms make the major decisions about production and consumption.

 Command Economy: A command economy is one in which the government

makes all important decisions regarding production and consumption.

 Mixed Economies: A mixed economy is one in which neither private firms nor
government holds absolute control on the decisions regarding production and
consumption.
Societies Technological Possibilities

 Inputs and Outputs

 Factors of Production
 Land
 Labor
 Capital
 Organization
 The Production Possibilities Frontier
 Opportunity Costs
 Efficiency
Production Possibilities Frontier

 PPF shows the maximum quantity of goods that can be efficiently produced
by an economy, given its technological knowledge and quantity of available
inputs.
Opportunity Costs

 Robert Frost wrote “the road not taken”

 In a world of scarcity, choosing one thing means giving up something else. The
opportunity cost of a decision is the value of the goods or services foregone.
Efficiency

 Efficiency means that the economies resources are being used as effectively
as possible to satisfy people’s desires.
 Production efficiency – the economy is on the frontier rather than inside the
production possibilities frontier
 Production efficiency occurs when an economy can not produce more of one
good without producing less of another goods; this implies that the economy
is on its production possibilities frontier.
Branches of Economics

Micro Macro
Economics Economics