Basic Concepts

Economics: The BasicsWhen wants exceed the resources available to satisfy them, there is scarcity.

Faced with scarcity, people must make choices.

Economics is the study of the choices people make to cope with scarcity.

Choosing more of one thing means having less of something else.

The opportunity cost of any action is the best alternative forgone.

What is Economics in General?

Economics is the study of _________.

• Economics is the science of scarcity.• Scarcity is the condition in which our

wants are greater than our limited resources.

• Since we are unable to have everything we desire, we must make choices on how we will use our resources.

• In economics we will study the choices of individuals, firms, and governments.

choices

Economics DefinedEconomics-Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants.

(Study of how individuals and societies deal with ________)

Examples: You must choose between buying jeans or buying shoes.Businesses must choose how many people to hireGovernments must choose how much to spend on welfare.

scarcity

Micro vs. MacroMICROeconomics-

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

MACROeconomics-Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Inflation, Unemployment, etc.)

The Basics (Cont..)Microeconomics - The study of the decisions of people and businesses and the interaction of those decisions in markets. The goal of microeconomics is to explain the prices and quantities of individual goods and services.

Macroeconomics - The study of the national economy and the global economy and the way that economic aggregates grow and fluctuate. The goal of macroeconomics is to explain average prices and the total employment, income, and production.

Positive statements - Statements about what is.

Normative statements - Statements about what ought to be.

Ceteris paribus - Other things being equal” or “if all other relevant things remain the same.

The Basics (Cont..)The fallacy of composition - What is true of the parts may not be true of the whole. What is true of the whole may not be true of the parts.

The post hoc fallacy - The error of reasoning from timing to cause and effect.

Economic efficiency - Production costs are as low as possible and consumers are as satisfied as possible with the combination of goods and services that is being produced.

Economic growth - The increase in incomes and production per person. It results from the ongoing advance of technology, the accumulation of ever larger quantities of productive equipment and ever rising standards of education.

Economic stability - The absence of wide fluctuations in the economic growth rate, the level of employment, and average prices.

The Modern economy

Economy - A mechanism that allocates scarce resources among alternative uses. This mechanism achieves five things: What, How, When, Where, Who.

Decision makers - Households, Firms, Governments.

Household - Any group of people living together as a decision-making unit. Every individual in the economy belongs to a household.

Cont…

Firm - An organization that uses resources to produce goods and services. All producers are called firms, no matter how big they are or what they produce. Car makers, farmers, banks, and insurance companies are all firms.

Government - A many-layered organization that sets laws and rules, operates a law-enforcement mechanism, taxes households and firms, and provides public goods and services such as national defense, public health, transportation, and education.

 

Market - Any arrangement that enables buyers and sellers to get information and to do business with each other.

Positive Economics

Examines matters of economics that can be proven to be right or wrong by

looking at facts.

Normative economics

Examines matters of economics that are based upon opinion and so are hard to be

proven to be right or wrong.

MicroeconomicsIs the study of the individual markets and

decisions by individual households and firms

Macroeconomicsis the study of the economy as a whole.

ScarcityIs a term used for a limited availability of

recourses

Free market economyWhen the productions are privately held by

individuals and firms

Opportunity costIs the sacrifice made In the next best alternative.

Type of goodFree good

Involve no opportunity costCapital Good

Use consumption goods in the futureConsumption Good

bought for final consumption

Factors of Production-Land-natural resources-Labor-human resources-Capital- man maid aids to production-Entrepreneurship- this is the ability to combine

Production possibility Curve (PPC)Shows the maximum combination of goods and services which can be produced given

the existing levels of resources.

0

Economic development Concept involving improvement in standards of living, reduction in poverty, improved health, and improved

educationSustainable development

Is the economic development that meets its needs of the present without compromising the ability of the future

generation to meet their needs.

A

B

Economic Growth

Shift in Production

Actual outputThe production of goods and services in the

economy achieved in a certain period of timePotential output

The possible production that would be achieved if the available factors were employed.

Actual GrowthWhen unemployed factors of production are

brought into usePotential grown

When the quantity or quality of factors of production within an economy increases

Economic Growth growth of real output in an economy