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1. Chapter 1: Introduction Guidelines
This course is supposedly the first course in economics that some students take at the university level, so it starts with a
definition of economics, and then continues to the scope and method of economics.
1. Definition of Economics: Economics is the study of how a society chooses to allocate scarce resources that could have
alternative uses to produce commodities and distribute them among the various groups in society.
This is a loaded definition. The bold words above are important and need more clarification.
Study: Economics is the study or science. A social science which is different from the physical sciences or hard sciences.
Economics is a soft science. It is a social science because it studies human behavior in the market (micro) or in the economy
(macro). The physical sciences or hard sciences study physical matter such as atoms, molecules, etc.… Economics however,
studies human behavior which is not so exact. Human behavior is unpredictable (as the 2008 financial crisis proved). In this
course we will study human behavior of consumers and producers and how the two interact in the market.
Choice: Economics is the study of choice. Choices must be made at the individual level (micro), and at the social level
(macro). The need for choice comes from scarcity. Resources are scarce or limited or fixed. Economists speak of the Law of
scarcity. All resources are scarce with varying degrees. There are 3 basic resources: land or nature, labor or humans, and
everything else called capital. Capital is man-made. Capital is both physical and human. Physical capital includes resources
such as machines, and human capital includes resources such as experience, know-how, brains, and entrepreneurship.
Allocation: Economics is the study of allocation of scarce resources. We must choose how to use or employ these limited
resources wisely or efficiently. Hence, efficiency is the ultimate objective in economics. Efficiency has many meanings such as
maximum production or no waste. No resources should be wasted. We should use our people, land, water, money etc.… for
the best possible production

2. Production: Economics is the study of production. The economy is like a big machine. We pour in it our resources or factors of
production (FOP’s) also called inputs, and the economy or this big machine gives out products (outputs).
Commodities: Are goods and services. Tables, shoes, … are goods, and education, insurance, banking, … are services.
Distribution: Economics is the study of distribution of commodities or distribution of income. Hence, equity or fairness is also
an objective in economics.
1. Scarcity, Choice, and Opportunity Cost: Since resources are scarce, choice must be made, so this entails opportunity cost.
Opportunity cost is the return or benefit lost had we used resources in the second-best alternative. Since resources have
alternative uses, then as rational decision makers, we rank the alternative uses from best to worst, then we choose the
best. But any choice has a gain and a loss. The loss is called opportunity cost. For example, since time is scarce, we rank the
alternative uses from best to worst. So had there been no pandemic, we would meet every Monday from 9:00 am to 10:15
am in class. So, you as students would rank the alternative of uses of 75 minutes from best to worst. (1) go to class, (2)
sleep, or work, or play cards, or have breakfast, etc.…As rational people, which is the assumption made by economists, you
choose number (1) go to class. But you lose number (2) which varies from one student to another. Opportunity cost is
important in economics and has many applications as we will see later. In a nutshell, economics is a way of thinking. It is
common sense. Basically it is the calculation of benefits and costs.
Economic Methodology: Economists are scientists, so they adopt the scientific approach. They make observations, collect
data, analyze the data, and then reach conclusions. Economists also use theories or models to simplify reality which is
complex. So, they abstract or move away from reality to make it simpler. Just as we go to the sky to draw a map, economists go
the sky or abstract from reality to see better. Models or theories are simplifications of reality. They must begin with simplifying
assumptions (such as the rationality assumption mentioned above). The assumptions could be realistic or unrealistic by their
nature. Assumptions are taken for granted; we do not have to prove them. Unfortunately, when
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3. 1. the assumptions become false, the theory or model becomes false as the 2008 financial crisis proved. Decision makers in financial
markets were making “irrational” decisions leading to the crisis. To understand why, economists developed a new field called Behavioral
Economics which borrows from psychology and sociology to understand human behavior.
Another tool of abstraction from reality is math. Economists use a lot of math today. Sometimes they overdo it, but it is a good tool of
abstraction. Some say it is a better language!!! The language of economists today is math. Hence, the term marginalism or marginal
analysis which comes from math. It is the calculation of benefits and costs at the margin or per-unit. It really comes from derivatives in
math. So marginal cost, marginal utility, marginal revenue, etc…all come from math. The marginal is the derivative of the total. So, MC is
derivative of TC, MR is derivative of TR, MU is derivative of TU…
2. Fields of specialization in economics: Economics has many diverse fields or branches. There are two big branches called micro and
macro, and there are other smaller branches such as: money, banking, international trade, industrial organization, etc.…
Micro is the study of the part, and macro is the study of the whole. Let me also note that economists also rely on ECONOMETRICS which is a
combination of economics and statistics. Today, because of the advance of computers, economists rely more and more on econometrics or
econometric models. So big universities have their own econometric models, the government has its econometric models, central banks
have their econometric models etc.…. These models allow economists to make predictions about the future of the economy. Unfortunately,
these big advanced computer models were unable to predict the 2008 financial crisis!!
1. Positive vs. Normative Economics: Positive science in general aims to describe by relying on facts. Normative science in general aims to
prescribe by relying on morals and beliefs and value-judgments. Most economists agree on the description or what there is, but they
disagree on the prescription or what should be done (policy).
2. Fallacies in Economics: A fallacy is a mistake in logic or logical analysis. Post hoc fallacy and the fallacy of composition should be
avoided. Post hoc is a mistake in cause and effect usually made when two events A and B happen after each other. This does not mean
that A is causing B. Fallacy of composition is a mistake in generalization. What is true for one (micro) is not true for all (macro).
3. Ceteris Paribus Assumption: A Latin term that means keeping everything else fixed. It helps to avoid the post hoc fallacy. So, if A
happens first, and B happens second keeping everything else fixed, then A is causing B.
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