Introduction to fundamental economic concepts

1. INTRODUCTION
Scarcity, Choices & Allocation

2. WHAT IS ECONOMICS?
 Def. 1: “The study of mankind in the ordinary
business of life.”~ Alfred Marshall
 Def. 2: “The study of the use of scarce resources
which have alternative uses.”~ Lionel Robbins

3. WHAT IS SCARCITY?
 Scarcity is a function of both availability and
desirability.
 In a market economy, price signals the scarcity
of a good or service.
 Scarcity exists because
 resources are limited
 human wants and desires are unlimited.

4. THE ECONOMIC PROBLEM
 How should society allocate its scarce resources
to satisfy our wants and desires to the greatest
extent possible?
 An allocation that solves the economic problem
is economically efficient.
 Economic efficiency means that resources flow
to their most valued use.
 Individual perspective: How should you allocate
your time and income to achieve the highest
level of satisfaction?

5. CHOICES AND ALLOCATION
Choices
Tastes &
preferences
Resource
constraints

6. CHOICES AND ALLOCATION
 Who are making the choices?
 Private agents in markets
 Government bodies (collective decision-making)
 Society’s allocation: markets vs. government
 Free markets-------------------Command economy
 Percentage of national output produced by the
government
 U.S.A is a mixed, market economy.

7. CHOICES AND ALLOCATION
 Criteria to evaluate allocation:
 Economic efficiency
 Equity
 Liberty (individual rights)
 Institutions necessary for free markets:
 Private property rights
 Rule of law
 Reliable judicial system

8. RISE OF FREE MARKETS
 Economic and political freedom
 Number of nations classified as liberal
democracies:
 1776: 1
 1790: 3
 1848: 5
 1975: 31
 2000: 120 (86)