CHAPTER

What Is Economics?

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Andreea CHIRITESCU
Eastern Illinois
Eastern Illinois University
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 Scarcity and Individual Choice
What is Economics?
-

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 Scarcity and Individual Choice
• Economics
– Study of choice under conditions of
scarcity
• Scarcity
– A situation in which the amount of
something available
– Is insufficient to satisfy the desire for it

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 Scarcity and Individual Choice
• Scarcity of time
– Limited number of hours in each day
• Scarcity of spending power
– Limited spending power
• Because of scarcity
– We have to make choices

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 Scarcity and Individual Choice
• Opportunity cost
– What is given up when taking an action or
making a choice
– What we must forego when we make that
choice
• When the alternatives to a choice are
mutually exclusive
– Only the next best choice is used to
determine the opportunity cost of the
choice
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 Scarcity and Individual Choice
• The opportunity cost of college
– Opportunity cost of attending college for an
academic year
• The opportunity cost of a choice
– Explicit costs
– Implicit costs
Explicit cost
– The dollars sacrificed – and actually paid out – for a
choice
Implicit cost
– The value of something sacrificed when no direct
payment is made
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 Scarcity and Individual Choice
• Society
– Goals:
• High standard of living for our citizens
• Clean air
• Safe streets
• Good schools, etc.
– The problem: scarcity of resources

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 Scarcity and Individual Choice
• Resources
– Things we use to make goods and
services that help us achieve our goals
– The labor, capital, land and natural
resources, and entrepreneurship
• That are used to produce goods and services

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 The Four Resources
1. Labor
– Time human beings spend producing
goods and services
2. Capital
– A long-lasting tool that is used to produce
other goods
– Physical capital
– Human capital

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 The Four Resources
• Physical capital
– Physical goods
• Machinery, equipment, factories
• Human capital
– Skills and training of the labor force
– Long-lasting
• Capital
– Should last at least a year

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 The Four Resources
3. Land
– Physical space on which production takes
place
– And the natural resources that come with it
4. Entrepreneurship
– Ability and willingness to combine the
other resources into a productive
enterprise

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 The Four Resources
• Entrepreneur
– Innovator
– Risk taker
• Inputs
– Anything used to produce a good or
service

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 Figure 2
Resources and Production

All goods and services come ultimately from the four resources. Resources are used directly by
firms that produce goods and services. Resources are also used indirectly, to make the other
inputs firms use to produce goods and services.

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 Scarcity and Individual Choice
• For the society
– Opportunity cost arises from scarcity of
resources
• Virtually all production: opportunity cost
– To produce more of one thing
– Society must shift resources away from
producing something else

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 The World of Economics
• Microeconomics
– Behavior of individual households, firms,
and governments
• Choices they make
• Their interaction in specific markets.
– Greek word mikros, meaning “small”
• Macroeconomics
– Behavior of the overall economy
– Greek word makros, or “large”

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 The World of Economics
• Examples of Microeconomics

• Examples of Macroeconomics

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 The World of Economics
• Positive economics
– The study of how the economy works

• Normative economics
– The practice of recommending policies to
solve economic problems

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 The World of Economics
• Examples Positive economics
1.
2.
3.

• Examples Normative economics

1.
2.
3.
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 Why Study Economics?
• To understand the world better
– Global and catastrophic events
• Wars, famines, epidemics, and depressions
– Local and personal events
• Salary, rent
• To achieve social change
– Understand the origins of social problems
– Explain why previous efforts to solve them
haven’t succeeded
– Design new, more effective solutions
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 Why Study Economics?
• To help prepare for other careers
– Business, politics, international relations,
law, medicine, engineering, psychology
• To become an economist
– Universities and banks
– Manufacturing companies
– Government agencies
– International organizations
– The media and nonprofit organizations
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 The Methods of Economics
• Model
– An abstract representation of reality
– Should be as simple as possible to
accomplish its purpose
– Makes two types of assumptions
• Simplifying assumptions
• Critical assumptions

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 The Methods of Economics
• Simplifying assumption
– Any assumption that makes a model
simpler without affecting any of its
important conclusions
• Critical assumption
– Any assumption that affects the
conclusions of a model in an important
way

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