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1
Chapter 1
Introducing Economics
2
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
3
Microeconomics vs.
Macroeconomics
• Macroeconomics
The branch of
economics that
studies decision-
making for the
economy as a
whole
• Microeconomics
The branch of
economics that
studies decision-
making by a
single individual,
household, firm,
industry, or level
of government
4
What is
Ceteris Paribus?
A Latin phrase that means
that while certain variables
can change, “all other
things remain unchanged”
5
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.
6
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 products
Factors of Production
7
LandLand
LaborLabor
CapitalCapital
Entrepreneurship organizes
resources to produce goods
and services
Entrepreneurship organizes
resources to produce goods
and services
8
Graphs provide a means to clearly
show economic relationships in two-
dimensional space. Economic analysis
is often concerned with two variables
confined to the upper right-hand
(northeast) quadrant of the coordinate
number system.
Graph
9
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
10
Marginal Analysis
- An examination of the
effects of additions to or
subtractions from a
current situation
11
Production Possibilities
Curve:
- A curve that shows the
maximum combinations of
two outputs that an
economy can produce,
given its available
resources and technology
12
Technology:
The body of knowledge
and skills applied to
how goods are
produced
13
A
B
MilitaryGoods
Consumer Goods
Unattainable
Inefficient
Production Possibilities Curve
Efficient
14
• A production possibilities curve
illustrates an economy’s 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:
Production Possibilities Curve
15
(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.
16
• 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.
Points “inside”, “along” and
“outside” the PPC
17
• 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.
The shape of PPC
18
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
19
A
MilitaryGoods
Consumer Goods
Increase in Resources
B
20
Agriculture
Manufacture
Technological Advance in
Manufacturing Sector
21
Increase in
Resources
Balanced
Economic
growth
22
Technological
advance
Unbalanced
Economic
growth
23
- 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 society’s citizens.
Basic Economic Problems

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Chapter1introductionwithoutgraph 130103102534-phpapp01

  • 2. 2 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
  • 3. 3 Microeconomics vs. Macroeconomics • Macroeconomics The branch of economics that studies decision- making for the economy as a whole • Microeconomics The branch of economics that studies decision- making by a single individual, household, firm, industry, or level of government
  • 4. 4 What is Ceteris Paribus? A Latin phrase that means that while certain variables can change, “all other things remain unchanged”
  • 5. 5 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.
  • 6. 6 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 products Factors of Production
  • 7. 7 LandLand LaborLabor CapitalCapital Entrepreneurship organizes resources to produce goods and services Entrepreneurship organizes resources to produce goods and services
  • 8. 8 Graphs provide a means to clearly show economic relationships in two- dimensional space. Economic analysis is often concerned with two variables confined to the upper right-hand (northeast) quadrant of the coordinate number system. Graph
  • 9. 9 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
  • 10. 10 Marginal Analysis - An examination of the effects of additions to or subtractions from a current situation
  • 11. 11 Production Possibilities Curve: - A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology
  • 12. 12 Technology: The body of knowledge and skills applied to how goods are produced
  • 14. 14 • A production possibilities curve illustrates an economy’s 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: Production Possibilities Curve
  • 15. 15 (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.
  • 16. 16 • 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. Points “inside”, “along” and “outside” the PPC
  • 17. 17 • 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. The shape of PPC
  • 18. 18 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
  • 23. 23 - 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 society’s citizens. Basic Economic Problems