Basic Concepts

Economics: The Basics

When wants exceed the resources available to satisfy them, there
is scarcity.

Faced with scarcity, people must make choices.

Economics is the study of the choices people make to cope with

scarcity.

Choosing more of one thing means having less of something else.

The opportunity cost of any action is the best alternative forgone.

What is Economics in General?

Economics is the science of scarcity.

Scarcity is the condition in which our
wants are greater than our limited
resources.
Since we are unable to have everything
we desire, we must make choices on how
we will use our resources.
In economics we will study the choices of
individuals, firms, and governments.
choices
Economics is the study of
_________.

Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on welfare.

Economics Defined
Economics-Social science concerned with
the efficient use of limited resources to
achieve maximum satisfaction of
economic wants.
(Study of how individuals and societies
deal with ________)
scarcity

Micro vs. Macro

MICROeconomicsStudy of small economic units such as
individuals, firms, and industries (competitive
markets, labor markets, personal decision
making, etc.)

MACROeconomicsStudy of the large economy as a whole or in

its basic subdivisions (National Economic
Growth, Government Spending, Inflation,
Unemployment, etc.)

The Basics (Cont..)

Microeconomics - The study of the decisions of people and
businesses and the interaction of those decisions in markets. The
goal of microeconomics is to explain the prices and quantities of
individual goods and services.
Macroeconomics - The study of the national economy and the
global economy and the way that economic aggregates grow and
fluctuate. The goal of macroeconomics is to explain average
prices and the total employment, income, and production.
Positive statements - Statements about what is.
Normative statements - Statements about what ought to be.
Ceteris paribus - Other things being equal or if all other
relevant things remain the same.

The Basics (Cont..)

The fallacy of composition - What is true of the parts may not be
true of the whole. What is true of the whole may not be true of
the parts.
The post hoc fallacy - The error of reasoning from timing to
cause and effect.
Economic efficiency - Production costs are as low as possible and
consumers are as satisfied as possible with the combination of
goods and services that is being produced.
Economic growth - The increase in incomes and production per
person. It results from the ongoing advance of technology, the
accumulation of ever larger quantities of productive equipment
and ever rising standards of education.
Economic stability - The absence of wide fluctuations in the
economic growth rate, the level of employment, and average
prices.

The Modern economy

Economy - A mechanism that allocates scarce resources among
alternative uses. This mechanism achieves five things: What,
How, When, Where, Who.

Decision makers - Households, Firms, Governments.

Household - Any group of people living together as a decisionmaking unit. Every individual in the economy belongs to a
household.
Cont

Firm - An organization that uses resources to produce goods

and services. All producers are called firms, no matter how
big they are or what they produce. Car makers, farmers,
banks, and insurance companies are all firms.

Government - A many-layered organization that sets laws and

rules, operates a law-enforcement mechanism, taxes
households and firms, and provides public goods and services
such as national defense, public health, transportation, and
education.

Market - Any arrangement that enables buyers and sellers to

get information and to do business with each other.

Positive Economics
Examines matters of economics that can
be proven to be right or wrong by
looking at facts.
Normative economics
Examines matters of economics that are
based upon opinion and so are hard to be
proven to be right or wrong.

Microeconomics
Is the study of the individual markets and
decisions by individual households and
firms

Macroeconomics
is the study of the economy as a whole.

Scarcity
Is a term used for a limited availability of
recourses

Free market economy

When the productions are privately held by
individuals and firms

Opportunity cost
Is the sacrifice made In the next best alternative.

Type of good
Free good
Involve no opportunity cost
Capital Good
Use consumption goods in the future
Consumption Good
bought for final consumption

Factors of Production
-Land-natural resources
-Labor-human resources
-Capital- man maid aids to productionEntrepreneurship- this is the ability to
combine

Production possibility Curve (PPC)

Shows the maximum combination of goods
and services which can be produced given
the existing levels of resources.

education
Sustainable development
Is the economic development that meets its needs of the
present without compromising the ability of the future
generation to meet their needs.

Economic Growth
B
A

Shift in Production

Actual output
The production of goods and services in the
economy achieved in a certain period of time
Potential output
The possible production that would be achieved
if the available factors were employed.
Actual Growth
When unemployed factors of production are
brought into use
Potential grown
When the quantity or quality of factors of
production within an economy increases
Economic Growth
growth of real output in an economy