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Chapter 1
Introducing Economics
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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
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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
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What is
Ceteris Paribus?
A Latin phrase that means
that while certain variables
can change, all other
things remain unchanged
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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.
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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
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Land
Labor
Capital
Entrepreneurship organizes
resources to produce goods
and services
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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
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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
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Marginal Analysis
- An examination of the
effects of additions to or
subtractions from a
current situation
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Production Possibilities
Curve:
- A curve that shows the
maximum combinations of
two outputs that an
economy can produce,
given its available
resources and technology
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Technology:
The body of knowledge
and skills applied to
how goods are
produced
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A
B
M
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G
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Consumer Goods
Unattainable
Inefficient
Production Possibilities Curve
Efficient
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A production possibilities curve
illustrates an economys 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
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(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.
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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
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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
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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
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A
M
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G
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Consumer Goods
Increase in Resources
B
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A
g
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Manufacture
Technological Advance in
Manufacturing Sector
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Increase in
Resources
Balanced
Economic
growth
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Technological
advance
Unbalanced
Economic
growth
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- 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 societys citizens.
Basic Economic Problems