The document provides an overview of key concepts in economics. It discusses: 1) Economics is the study of choice under conditions of scarcity. Scarcity means that resources are insufficient to satisfy all wants and needs. 2) Scarcity applies at both the individual and societal level and forces trade-offs in how resources are allocated. Economists study how individuals and societies make choices. 3) There are different methods for allocating scarce resources in an economy, including traditional, command, and market-based approaches.

1.  What is Economics?
 Two important terms:
1. Choice
2. Scarcity
 Study of choice under conditions of scarcity
 Scarcity
 Situation in which the amount of something
available is insufficient to satisfy the desire for it

2. Scarcity and Individual Choice
 There are an unlimited variety of scarcities,
however they are all based on two basic
limitations
 Scarce time
 Scarce spending power
 Limitations
force each of us to make choices
 Economists study
 choices we make as individuals, and consequences
of those choices
 more subtle and indirect effects of individual choice
on our society

3. Scarcity and Social Choice
 Resources in our society —land, labor, and capital—are limited
 Scarcity of Labor
 Time human beings spend producing goods and services
 Scarcity of Capital
 Something produced that is long-lasting, and used to make other
things that we value
 Human capital
 Capital stock
 Scarcity of land/natural resources
 Physical space on which production occurs, and the natural
resources that come with it
 Scarcity of entrepreneurship
 Ability and willingness to combine the other resources into a
productive enterprise

4. Agents and Scarcity in Economics
 Who are involved in resource allocation?
 Households allocate limited income / time among
goods and services
 Business firms choices of what to produce and how
much are limited by costs of production
 Government agencies work with limited budgets and
must carefully choose which goals to pursue
 Economists study these decisions to
 Explainhow our economic system works
 Forecast the future of our economy
 Suggest ways to make that future even better

5. Microeconomics vs Macroeconomics
 Micro
 Microcomes from Greek word mikros,
meaning “small”
 Microeconomics
 Study of behavior of individual households,
firms, and governments
 Choices they make
 Interaction in specific markets
 Focuses
on individual parts of an
economy, rather than the whole

6. Microeconomics vs Macroeconomics
 Macro
 Macro comes from Greek word, makros,
meaning “large”
 Macroeconomics
 Study of the economy as a whole
 Focuses on big picture and ignores fine
details

7. Microeconomics
 Scarcity, opportunity cost
 Price determination -- theory of Supply and
Demand
 Elasticities
 Consumer Choice
 Production and cost, Producer Choice
 Perfect competition and imperfect competition
 Labor market and Economic Inequality
 Capital and investment
 Economic Efficiency

8. Positive Economics v.s. Normative Economics
 Positive economics
 tudy
S of how economy works
 ccessing the expected, objective
A
outcomes
 o matter whether they are true or not
N
 ccuracy of positive statements can be
A
tested by looking at the facts—and just the
facts

9. Positive Economics v.s. Normative Economics
 Normative Economics
 Study of what should be
 Used to make value judgments, identify
problems, and prescribe solutions
 Statements that suggest what we should do
about economic facts, are normative
statements
 Based on values
 Normative statements cannot be proved or
disproved by the facts alone

10. Why Study Economics
 To understand the world better
 You’llbegin to understand the cause of many of the things that
affect your life
 To gain self-confidence
 You’ll
lose that feeling that mysterious, inexplicable forces are
shaping your life for you
 To achieve social change
 understand origins of social problems and design more effective
solutions
 To help prepare for other careers
 You’ll
discover that a wide range of careers deal with economic
issues on many levels

11. The Methods of Economics
 Modeling
 Model: Abstractrepresentation of reality
 Economic theories must have a well-
constructed model
 While most models are physical constructs
 Economists use words, diagrams, and
mathematical statements

12. Assumptions
 Assumptions are very important for modeling
 Types of assumptions in an economic model
 Simplifying assumptions
 Way of making a model simpler without affecting any of its
important conclusions
 Critical assumptions
 Affect conclusions of a model in important ways
 If critical assumptions are wrong model will be wrong
 All
economic models have one or more critical
assumptions

13. Questions
1. What are the opportunity costs of the choices you
make?
2. How does a production possibility frontier (PPF)
illustrate opportunity cost, specialization of resources,
inefficiency, and economic growth?
3. What are the differences between command
economies, free market economies, and mixed
economies in terms of the ways they address the 3
basic economic questions?
4. Why do we observe specialization in production and
trade?

14. Opportunity Cost - Concept
 Remember that scarcity in time and money
results in choice making in real world
 Definition: Opportunity cost of any choice
 What we forego when we make that choice
 Most accurate and complete concept of cost we
should use when making decisions
 An Example:
 in one hour, George can fix 4 flat tires or type 200
words. What is his opportunity cost of fixing a flat
tire? What is his opportunity cost of typing 100
words?

15. Opportunity Cost - Components
 Direct money cost of a choice may only be a part of
opportunity cost of that choice
 Opportunity cost of a choice
= explicit costs + implicit costs
 Explicit cost—money actually paid out for a
choice
 Accounting cost
 Implicit cost—value of something sacrificed when
no direct payment is made

16. Opportunity Cost - Examples
 Opportunity cost of investing on education
 Explicit cost: tuition and fees
 Implicit cost: time or forgone income
 Opportunity cost of a typical firm
Explicit cost Implicit cost
Rent paid out Owner’s rent forgone
Manager’s salaries Owner’s return from investment
Worker’s wages Owner’s labor income forgone
Cost of raw material
Interest on loans

17. Opportunity Cost and Society
 Resources in whole society are limited.
 All production carries an opportunity cost
 o produce more of one thing
T
 Must
shift resources away from producing
something else
 There is no such thing as a free lunch!

18. Increasing Opportunity Cost
 According to law of increasing
opportunity cost
 he
T more of something we produce
 The
greater the opportunity cost of
producing even more of it
 This principle applies to all of
society’s production choices

19. Production Possibilities Frontiers
 ProductionPossibilities Frontiers (PPF)
shows the combinations of two goods that
can be produced with resources and
technology available

20. Figure 1: (PPF)
cars At point A, all
resources are used
for ”biofuels."
A Moving from point A to point B
1,000,000 B
950,000 requires shifting resources out of
850,000 C biofuels and into grains/ food.
D
700,000
500,000 At point F. all
W E resources are used
400,000
for grains/food
F
100,000 200,000 300,000 400,000 500,000 grains

21. Characteristics of PPF
 The points on the curve show the maximum number
of goods capable to be produced
 Unit in the horizontal and vertical axis is quantity (not
price) of the two different goods
 The points inside the curve show the possible other
combinations of goods possible to be produced
 Inefficient production
 The shape of the curve is concave toward the origin
in most cases
 The law of increasing opportunity cost
 The points outside the curve show the impossible
combinations of goods
Society’s choices are limited to points on or inside the
PPF

22. Productive Inefficiency
 Productive Inefficiency
 More of at least one good can be produced
 Without
pulling resources from the production of
any other good
 Reasons
 Wasteof sources
 Recession (economic slump)

23. Recessions
 A slowdownin overall economic activity
when resources are idle
 Widespread unemployment
 Factories shut down
 Land and capital are not being used
 An end to the recession would move the
economy from a point inside its PPF to a point
on its PPF
 Using idle resources to produce more goods and
services without sacrificing anything
 Can help us understand an otherwise confusing episode in
economic history

24. The Case of Production and
Unemployment in the US
1. Before WWII the United States
Military Goods operated inside its PPF . . .
per Period
2. then moved to the PPF
B during the war. Both
military and civilian
production increased.
A
Civilian Goods per Period

25. Economic Growth
 If economy is already operating on its PPF
 Cannot exploit opportunity to have more of everything by moving to it
 But what if the PPF itself were to change? Couldn’t we then
produce more of everything?
 This happens when an economy’s productive capacity grows
 Many factors contribute to economic growth, but they can be
divided into two categories
 Quantities of available resources—especially capital—can increase
 An increase in physical capital enables economy to produce more of
everything that uses these tools
 More factories, office buildings, tractors, or high-tech medical equipment
 Same is true for an increase in human capital
 Skills of doctors, engineers, construction workers, software writers, etc.
 Technological change enables us to produce more from a given
quantity of resources
 Capital and technological change usually go hand in hand

26. Economic Growth
 Increases in capital and technological change often go
hand in hand
 For instance, PET body scanners will enable us to save
even more lives than our current set of resources
 Moving horizontal intercept of PPF rightward, from F to F‘
 Impact of PET scanners stretches PPF outward along horizontal
axis
 How can a technological change in lifesaving enable us
to produce more goods in other areas of the economy?
 Society can choose to use some of increased lifesaving potential
to shift other resources out of medical care and into production
of other things
 Because of technological advance and new capital, we can shift
resources without sacrificing lives

27. Figure 3: The Effect of a New Medical
Technology
Quantity of All
2. But not its vertical
Other Goods 4. or more lives saved and greater
intercept.
per Period production of other goods.
A
1,000,000
3. The economy can end
J up with more lives
H saved and un-changed
700,000
production of other
D
goods . . .
1. A technological advance in
saving lives increases this
PPF's horizontal intercept . . .
F F'
300,000 500,000 600,000
Number of Lives Saved per Period

28. Economic Growth
 If we can produce more of the things that we value,
without having to produce less of anything else, have we
escaped from paying an opportunity cost?
 Yes . . . and no
 Figure 3 tells only part of story
 Leaves out steps needed to create this shift in the PPF
 For example, technological innovation doesn’t just “happen”—
resources must be used to create it
 Mostlyby research and development (R&D) departments of large
corporations
 In order to produce more goods and services in the
future, we must shift resources toward R&D and capital
production
 Away from production of things we’d enjoy right now

29. Specialization and Exchange
 self sufficiency
 Specialization
 Method of production in which each person concentrates on a
limited number of activities
 Example: Adam Smith observed that
 10 men produce 200 pins a day working separately
 10 men produce 48,000 pins a day through specialization!
 Exchange
- Practice of trading with others to obtain what we want
 Allows for
 Greater production
 Higher living standards than otherwise possible
 All economics exhibit high degrees of specialization and
exchange

30. Resource Allocation
 Problem of resource allocation
 Which goods and services should be produced with
society’s resources?
 Where on the PPF should economy operate?
 How should they be produced?
 Labor or Capital intensive
 No capital at all
 Small amount of capital
 More capital
 Who should get them?
 How do we distribute these products among the
different groups and individuals in our society?

31. The Three Methods of Resources
Allocation
 Traditional Economy
 Resources are allocated according to long-
lived practices from the past
 Command Economy (Centrally-Planned)
 Resources are allocated according to explicit
instructions from a central authority
 Market Economy
 Resources are allocated through individual
decision making
 Dominant method

32. The Nature of Markets
 A market is a group of buyers and
sellers with the potential to trade with
each other
 lobal
G markets
 Buyers and sellers spread across the globe
 ocal
L markets
 Buyersand sellers within a narrowly
defined area

33. The Importance of Prices
 A price is the amount of money that must
be paid to a seller to obtain a good or
service
 When people pay for resources allocated
by the market
 They must consider opportunity cost to
society of their individual actions
 Marketscan create a sensible allocation of
resources

34. Resource Allocation
 Various levels of government collect about one-
third of our incomes as taxes
 Enables government to allocate resources by
command
 Government uses regulations of various types to
impose constraints on our individual choice
 The market is the dominant method of resource
allocation
 However, it is not a pure market

35. Resource Ownership
 Communism
 Most resources are owned in common
 Socialism
 Most resources are owned by state
 Capitalism
 Most resources are owned privately

36. Types of Economic Systems
 Aneconomic system is composed of
two features
 echanism
M for allocating resources
 Market
 Command
 ode
M of resource ownership
 Private
 State

37. Figure 4: Types of Economic Systems
Resource Allocation
Market Command
Centrally
Market
Private Planned
Capitalism
Capitalism
Resource
Ownership
Centrally
Market
State Planned
Socialism
Socialism

38. Summaries
 Opportunity cost  Specialization and
 vsaccounting cost Exchange
 PPF
 Recession/inefficiency
 Economic system
 Economic growth /
Technological Change  4 types
 Law of increasing
opportunity cost
 Other Characteristics