W1 Topic 1.INTRODUCTION

TOPIC 1A
What Economics is
About
©2016 Cengage Learning. All Rights Reserved. May not be scanned,

copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Learning Outcomes
 Define “Economics”.
 Explain the different Economic categories.
 List and describe the types of resources.
 Explain key Economics concepts

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.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CH 1 • 3
SCARCITY （ MASALAH
KEKURANGAN)
► The condition in which

our wants are greater
than the limited
resources available to
satisfy those wants
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
ECONOMICS ~ GOODS AND BADS ~
 Bad - Anything from which
individuals receive disutility or
dissatisfaction
 Disutility - The dissatisfaction one

receives from a bad
ECONOMICS ~ RESOURCES ~
 The production of all goods and services requires the

resources (the input or factors of production).
► Land - All natural

resources, such as
minerals, forests,
water, and unimproved
land
► Labor - The physical

and mental talents
people contribute to the
production process.
► Eg. A person building a
house
► Capital - Produced
goods that can be
used as inputs for
further production,
such as factories,
machinery, tools,
computers, and
buildings
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
ECONOMIC CATEGORIES
POSITIVE VS. NORMATIVE
ECONOMICS
Positive - The study of “what is” in economic
matters.
Deal with cause-effect relationships that can be

tested.
i.e. What is the effect of a cut in income taxes on

unemployment rate?
Cause Effect
ECONOMIC CATEGORIES
POSITIVE VS. NORMATIVE
ECONOMICS
Normative - The study of “what should be” in
economic matters
Deal with value judgments and opinions that

cannot be tested.
i.e. The income taxes should be cut because the

income tax burden on many taxpayers is
currently high.
Judgment and Opinion

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.
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?
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.
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?
SCARCITY
► The condition in which

our wants are greater
than the limited
resources available to
satisfy those wants.
SCARCITY, CHOICE AND
OPPORTUNITY COSTS
SCARCITY’S EFFECTS
1. The Need to Make

Choices
2. The Need for a
Rationing Device
3. Competition
How does choice arise out of
scarcity?
SELFTEST
Because our unlimited wants are greater than
our limited resources—that is, because scarcity
exists—some wants must go unsatisfied. We
must choose which wants we will satisfy and
which we will not.
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.
1. Give an example to illustrate how a
change in opportunity cost can affect
behavior.
SELFTEST
A. Every time a person is late to Economics class, the instructor
subtracts one-tenth of a point from the person’s final grade. If
the instructor raised the opportunity cost of being late to class
—by subtracting one point from the person’s final grade—
economists predict there would be fewer persons late to class.
B. In summary, the higher the opportunity cost of being late to
class, the less likely people will be late to class.
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
How does competition arise out of scarcity?
Because of scarcity, there is a need for a rationing
device.
SELFTEST
People will compete for the rationing device.
For example, if dollar price is the rationing
device, people will compete for dollars.
TOPIC 1B
Production
Possibilities Frontier
Framework
©2016 Cengage Learning. All Rights Reserved. May not be scanned,

copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Learning Outcomes
 Define the production possibilities curve
(PPF).
 Plot and explain the types of PPF.
 Use the PPF to explain the seven basic

Economic concepts.
 List and explain the three types of economic

system.
Economic Activities
Two (2) types of economic activities:
1)Producing.
- Production possibilities frontier (PPF).
2)Trading.
- Exchange and trade.
Two (2) types of PPF:
1)The Straight Line PPF – constant

opportunity costs.
2) The Concave downward PPF – increasing

opportunity costs.
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.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FRONTIER
CONSTANT OPPORTUNITY COSTS
 Part (a): The economy can produce
any of the five combinations of books
and shirts
 Part (b):The production possibilities
frontier (PPF) is a straight line
because the opportunity cost of
producing either good is constant.
 From point A to B to E Opportunity
cost of 1 book= 1 shirt.
 Ratio is 1:1
FRONTIER
INCREASING OPPORTUNITY COSTS
 The production possibilities frontier in
part (b) is bowed outward (concave
downward) because the opportunity
cost of producing coffee makers
increases as more coffee makers are
produced.
 Point A to B: Opportunity cost of 1
coffee maker= 1 cell phone.
 Point B to C:Opportunity cost of 1
coffee maker= 2 cell phones
 Point C to D : Opportunity cost of 1
coffee maker= 3 cell phones
LAW OF INCREASING OPPORTUNITY
COSTS
As more of a good is
produced, the
opportunity costs of
producing that good
Increase.
LAW OF INCREASING OPPORTUNITY
COSTS
Why?
Firms must employ resources which are less
efficient and / or appropriate when increasing
production.
In the real world, most PPF lines are concave

downward.
● When we increase the number of houses we

build from 60 to 70 ( extra 10 units), we
forfeit(opportunity cost) 5 units of Good X.
● When we increase the number of houses we

build from 110 to 120 ( also extra 10 units),
we forfeit 20 units of Good X.
PRODUCTION POSSIBILITY
FRONTIER
FRAMEWORK FOR
UNDERSTANDING
ATTAINABLE AND UNATTAINABLE
REGIONS AND PRODUCTIVE
EFFICIENCY
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 (limited resources). The
PPF separates an attainable 达到 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?
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 ).
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or
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PRODUCTIVE EFFICIENCY AND
INEFFICIENCY
Productive Efficiency
The condition where the maximum output is produced
with given resources and technology
Productive Inefficiency
The condition where less than the maximum output is
produced with given resources and technology.
Productive inefficiency implies that more of one
good can be produced without any less of another
good being produced.
CONCEPTS III
► (5) Unemployment (in terms of

resources being unemployed)
exists at any productive
inefficient (that not using all of
its resources & tech with
producing max output) point
(such as F ), whereas resources
are fully employed at any
productive efficient point (such
as AE).
UNEMPLOYED VS. EMPLOYED
RESOURCES
● When the economy exhibits productive inefficiency,
it is not producing the maximum output with the
available resources and technology. One reason may
be that the economy is not using all of its resources;
that is some resources are unemployed.
● When the economy exhibits productive efficiency it
is producing the maximum output with the available
resources and technology. That is its resources are
fully employed.
ECONOMIC GROWTH WITHIN A PPF
FRAMEWORK
► An increase in resources or an
advance in technology can increase
the production capabilities of an
economy, leading to economic
growth and shift outward in the
production possibilities frontier.
► Economic Destruction
- Shift inward
- Decrease technology
- Decrease in resources
TECHNOLOGY
► Technology (high productivity) is the

body of skills and knowledge
involved in the use of resources in
production
► An advance in technology commonly
refers to the ability to produce more
output with a fixed amount of
resources or the ability to produce the
same output with fewer
resources(outside of PPF).
A politician says, “If you elect me, we can
get more of everything we want.” Under
what condition(s) is the politician telling
the truth?
SELFTEST
The first condition is that the economy is currently

operating below its PPF. It is possible to move
from a point below the PPF to a point on the PPF
and get more of all goods.
The second condition is that the economy’s PPF
shifts outward.
In an economy, only one combination of goods is
productive efficient. True or false? Explain your
answer.
SELFTEST
False. There are numerous productive efficient points, all of which
lie on the PPF.
The Economic Problem
The three basic questions facing all economic systems:
(1) What gets produced?
(2) How is it produced?
(3) Who gets it?
Given scarce resources, how do large, complex societies go

about answering the three basic economic questions?
Economic Systems
 Economic System: the way in which society

decides to answer key economic questions—in
particular those questions that relate to
production and trade.
 There are hundreds of countries but only TWO
major economic systems.
 We refer to these two major systems as
Socialism (ans by government) and Capitalism
(in market – ans by producer and consumer).
 Most Countries have Chosen Elements from
BOTH economic systems.
Mixed Capitalist Economies
 An economic system characterized by
largely private ownership of factors of
production, market allocation of
resources, and decentralized decision
making.
 Most activities take place in the private

sector in this system.
 Government normally plays a regulatory

role. (limited government intervention)

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TOPIC 1A

©2016 Cengage Learning. All Rights Reserved. May not be scanned,

 Explain the different Economic categories.

 List and describe the types of resources.

 Explain key Economics concepts

► The condition in which

 Utility - The satisfaction one

 Disutility - The dissatisfaction one

 The production of all goods and services requires the

► Land - All natural

► Labor - The physical

Entrepreneurship - The particular

Deal with cause-effect relationships that can be

i.e. What is the effect of a cut in income taxes on

Deal with value judgments and opinions that

i.e. The income taxes should be cut because the

Judgment and Opinion

 How does a market work?

 How does the economy work?

► The condition in which

1. The Need to Make

 The most highly valued opportunity

► A rationing device is a means

©2016 Cengage Learning. All Rights Reserved. May not be scanned,

 Plot and explain the types of PPF.

 Use the PPF to explain the seven basic

 List and explain the three types of economic

Two (2) types of economic activities:

1)The Straight Line PPF – constant

2) The Concave downward PPF – increasing

In the real world, most PPF lines are concave

● When we increase the number of houses we

● When we increase the number of houses we

(3) Opportunity cost is most easily

(4) Productive efficiency is represented

► (5) Unemployment (in terms of

► Technology (high productivity) is the

The first condition is that the economy is currently

(1) What gets produced?

(2) How is it produced?

(3) Who gets it?

Given scarce resources, how do large, complex societies go

 Economic System: the way in which society

 Most activities take place in the private

 Government normally plays a regulatory

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