Chapter 1

Introducing Economics

Definition of Economics
The study of how society
chooses to allocate its
scarce resources to the
production of goods and
services in order to satisfy
unlimited wants
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Microeconomics vs.
Macroeconomics
Microeconomics
The branch of
economics that
studies decisionmaking by a
single individual,
household, firm,
industry, or level
of government

Macroeconomics
The branch of
economics that
studies decisionmaking for the
economy as a
whole
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What is
Ceteris Paribus?
A Latin phrase that means
that while certain variables
can change, all other
things remain unchanged
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BASIC CONCEPTS:

Scarcity - the fundamental

economic problem that human
wants
exceed the availability of
time,
goods, and resources.

Choice Because individuals

and society can never have everything
they desire, they therefore are forced
to make choices

Opportunity cost the second best

alternative foregone for a chosen
option.

Factors of Production
1. Land Resource - any natural resource
provided by nature
2. Labour - The mental and physical capacity
of workers to produce goods and services
3. Capital - The physical plants, machinery,
and equipment used to produce other
goods
(Financial capital - The money used to
purchase capital)
4. Entrepreneurs - The creative ability of
individuals to seek profits by combining
resources to produce innovative products6

Land
Land

Labor
Labor

Capital
Capital

Entrepreneurship
organizes
Entrepreneurship organizes
resources
to
produce
goods
resources to produce goods
and
services
and services
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Graph
Graphs provide a means to clearly
show economic relationships in twodimensional space. Economic analysis
is often concerned with two variables
confined to the upper right-hand
(northeast) quadrant of the coordinate
number system.
8

A shift in a curve occurs only

when the ceteris paribus
assumption is relaxed and a third
variable not on either axis of the
graph is allowed to change

Marginal Analysis
- An examination of the
effects of additions to or
subtractions from a
current situation
10

Production Possibilities
Curve:
- A curve that shows the
maximum combinations of
two outputs that an
economy can produce,
given its available
resources and technology
11

Technology:
The body of knowledge
and skills applied to
how goods are
produced
12

Military Goods

Production Possibilities Curve

Efficient
Unattainable

Inefficient

B
Consumer Goods

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Production Possibilities Curve

A production possibilities curve
illustrates an economys capacity to
produce goods, subject to the constraint
of scarcity.
The production possibilities curve is a
graph of the maximum possible
combinations of two outputs that can
be produced in a given period of time,
subject to three conditions:
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(1) All resources are fully

employed
(2) The resource base is not
allowed to vary during the time
period.
(3) Technology, which is the
body of knowledge applied to the
production of goods, remains
constant.
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Points inside, along and

outside the PPC
Inefficient production occurs at any
point inside the production possibilities
curve.
All points along the curve are efficient
points because each point represents a
maximum output possibility.
All points outside the curve are
unattainable due to scarcity of resources.
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The shape of PPC

PPC is usually concave to the origin
because of the law of increasing opportunity
costs that states that the opportunity cost
increases as the production of an output
expands.
The explanation for the law of increasing
opportunity costs is that the suitability of
resources declines sharply as greater
amounts are transferred from producing one
output to producing another output.
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Economic Growth
The ability of an economy to
produce greater levels of output,
represented by an outward shift of
its production possibilities curve as
a result of an increase in resources
or an advance in technology

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Military Goods

Increase in Resources

B
A
Consumer Goods

19

Agriculture

Technological Advance in
Manufacturing Sector

Manufacture

20

Balanced
Economic
growth
Increase in
Resources
21

Unbalanced
Economic
growth
Technological
advance
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Basic Economic Problems

- The fundamental economic questions facing any
economy are What, How, and For Whom to
produce goods.
- The WHAT question asks exactly which goods
are to be produced and in what quantities.
- The HOW question requires society to decide the
resource mix used to produce goods.
-The FOR WHOM problem concerns the division
of output among societys citizens.
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