What Is Economics About?

ECO 104 Lecture 1

Scarcity

• Unlimited wants VS Limited resources… ….results in scarcity

• Economics is the science of scarcity; how the society and individuals tackle the problem of scarcity

Goods and Bads

• Good** – Anything from which individuals receive utility or satisfaction

• Bad - Anything from which individuals receive disutility or dissatisfaction

**Unlimited want of individuals and societies for goods**

Who makes the goods? A: Firms Using what? A: Resources

Resources / Inputs / Factors of production• Land – All natural resources, e.g. minerals, forests and water

• Labor – Physical and mental talents of workers in the production process

• Capital – Produced goods that can be used as inputs in the production process, e.g. factories, machines, computers

• Entrepreneurship – The talent for organizing the above mentioned resources to produce goods…

Scarcity’s Effects

1) Choices → Opportunity Costs

2) Rationing device – A means of deciding who gets what of available resources and goods

3) Competition (for goods and the rationing device)

Opportunity Cost and Behaviour

• The higher the opportunity cost of doing something, the less likely it will be done

Example(s)

• Changes in opportunity cost affect behaviour

Decisions Made at the Margin

• Marginal Benefits – The benefits obtained from the consumption of an additional unit of a good or undertaking one more unit of activity

• Marginal Costs – The costs incurred due to the consumption of an additional unit of a good or undertaking one more unit of activity

• Decisions at the Margin – Decision making based on weighing the marginal benefits and costs

Efficiency

The condition when marginal benefits equal marginal costs

IncentiveSomething that encourages or motivates a person to undertake an action

Unintended EffectsExample(s) (p. 12-13, ch. 1)

Exchange

The giving up of one thing for something else

…expectation of being better-off

Ceteris Paribus

“All other things constant”

• Designate the correct relationship between two variables

• Example(s)…

Theory

An abstract representation of the real world designed with the intent to better understand it

Emphasizes only on the variables that the theorist believes are the main or critical ones that explain an activity or event

A good theory accurately predicts real world phenomenon

Economic Categories

Positive economics – the study of “what is” in economics

Normative economics – the study of “what should be” in economics

Microeconomics – Branch of economics that studies human behaviour and choices as they relate to relatively small units: an individual, a firm, an industry, a single market

Macro - ...studies human behaviour and choices as they relate to the entire economy