Chapter 1: The foundations of economics

1.1 Economics is a social science

A social science is a field of academic scholarship that examines the interactions
between humans, our institutions (), our organizations and the natural and
social environment we inhabit ()

Economics is to learn how to balance infinite () physical needs and wants

with the finite () resources of the world.

1.2 Scarcity ()
It is the basic economic problem. Something is scarce when it is both limited in
supply and desired.

Land is scarce natural resources

Labor is scarce intellectual () and skilled labor
Capital is scarce amount of capital (tools and machines) is limited

Economics is the field of study that concerns itself with the allocation of the
scarce resources between the competing needs and wants of society.

Adam Smith (1723-90) self-interest an efficient allocation of societys

scarce resources.

The basic economic questions

1. What should be produced?
2. How should it be produced? Labor intensive or capital intensive
3. For whom should it be produced? Depends on income group

The market system

A market is a place where buyers and sellers come together to engage in
exchanges with one another.

The circular flow of a market economy

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1.3 Choice and opportunity cost

Scarcity choice opportunity cost

Opportunity cost is what must be given up in order to undertake any activity or

economic exchange.

1.4 The use of models in economics

Ceteris paribus () other things being equal

Positive economic statement

Example: unemployment rose by 0.8% last quarter as 250,000 Americans lost
their jobs in the public and private sectors.

Normative economic statement

Example: Unemployment rates are higher among less educated workers,
therefore government should include education and job-training programmes in
benefits for the nations unemployed.

The production possibilities curve (PPC)

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 Efficiency
Inefficiency
Economic growth

Economic growth is an increase the output of goods and services in a nation over
time.

Productivity is the output attributable to each unit of input. Increase in the

productivity of land, labor or capital lead to an overall increase in the output of a
nation.

1.5 Central themes in economics

The extent to which government should intervene () in the allocation of

resources.

The threat () to sustainability () as a result of the current patterns of

resource allocation.

The extent to which the goal of economic efficiency may conflict with the goal of
equity ()

The distinction between economic growth and economic development

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