topic 1 - definition & scope

PSCI 1500:

Introduction to Economics

Economics :

Definition & Scope

WHAT IS ECONOMICS

A social science that studies:

• human behaviors on how they make optimal

choices under conditions of ‘scarcity’.

• how limited resources are used to satisfy

people’s unlimited wants and needs.

INTRODUCTION

BASIC ECONOMIC

CONCEPTS

SCARCITY

OPPORTUNITY COST

CHOICE

SCARCITY

• Central economic problem - conventional view

• Refers to : when human wants are unlimited,

but the means to satisfy it are limited

• Thus, scarcity is a result of insufficient resources

to satisfy wants and needs.

CHOICE

• Scarcity requires choice to be made, since

resources can only be used for one purpose at

a time.

SCARCITY, CHOICE & OPPORTUNITY COST

OPPORTUNITY COST

The concept of opportunity cost explains that

everything has a cost associated with it.

Opportunity cost refers to the desired goods or

services that are foregone or given up in order

to obtain something else.

The opportunity cost of a decision (for example,

a production, or a purchase) measured in terms

of the foregone alternative.

In other words, opportunity cost is the next best

alternative that you didn’t choose.

SCARCITY, CHOICE & OPPORTUNITY COST

Resources used to produce goods and services,

and which are classified into four categories:

• Labor – includes all effort, both physical and

mental; receives wages

• Capital – includes warehouses, machinery,

and equipment; receives interest

• Land – includes all nature-originating

production inputs; receives rent

• Entrepreneurship – performance of a number

of critical tasks that are carried out in all

productive processes; receives profit

FACTORS OF PRODUCTION

RELATIONSHIP BETWEEN RESOURCES &

WANTS AND NEEDS

EFFICIENCY VS. EQUITY

EFFICIENCY

• Producing the largest attainable output of a

desired quality from a given set of resources;

occurs when goods and services are produced

at the lowest possible cost.

• If goods and services are produced efficiently,

society would experience the greatest possible

lessening of the scarcity problem.

EQUITY

The concept of just and equitable distribution

of goods and services. It is controversial as it’s

based on people’s value judgments.

ECONOMIC THEORY VS. POLICY

ECONOMIC THEORY

Formal explanation of the relationship between

economic variables; provides a reason why

something happens, offers a cause-and-effect

interpretation for a set of events, or shows the

effect on one variable when another changes.

ECONOMIC POLICY

Action taken to change or remedy an

economic condition, which is often a result of

a decision made by a policymaker.

WHY ECONOMISTS DISAGREE?

• They may disagree about the validity of

alternative positive theories about how the

world works.

• They may have different values and, therefore,

different normative views about what policy

should try to accomplish.

POSITIVE VS. NORMATIVE ECONOMICS

• POSITIVE economic statement describes the

economy as it actually is, avoiding value

judgments and attempting to establish

scientific statements about economic behavior.

• NORMATIVE economics statement involves value judgments about what the economy

should be like and the desirability of the policy

options available. Most disagreements among

economists involve normative, value-based

questions.

POSITIVE VS. NORMATIVE ECONOMICS

In short,

• Positive statements are statements that attempt

to describe the world as it is.

• Called descriptive analysis

• Normative statements are statements about

how the world should be.

• Called prescriptive analysis

MICROECONOMICS VS. MACROECONOMICS

MACROECONOMICS

• Focuses on the operation of the economy as a

whole; interactions of household, business,

government & foreign sectors in the economy.

• Includes such topics as inflation, unemployment,

taxes, government spending and money.

MICROECONOMICS

• Focuses on behavior of individual businesses &

households; specific product & resource markets.

• Includes such topics as consumer behavior, cost-

benefit analysis, determination of business profits,

determination of prices in specific markets.

PRODUCTION POSSIBILITIES

All economies are subject to a trade-off

between the production of capital goods and

consumer goods.

Capital Goods

Goods, such as machinery and equipment, that

are used to produce other goods and services.

Consumer Goods

Goods, such as food and household furniture,

that are produced for final buyers.

SCARCITY : PRODUCTION POSSIBILITIES

PRODUCTION POSSIBILITIES TABLE Lists the possible levels of production in an economy

In the following model, assume that all of the economy’s resources will be used to produce only two goods


• PRODUCTION POSSIBILITIES CURVE (PPC)

• Plotting the data from the production possibilities table


• Point A (outside the curve) is unattainable due to the

problem of scarcity

• Point B (inside the curve) is attainable but inefficient, due to underutilization of resources/ resources not utilized to its full

potential (i.e. unemployment)

• The economy should produce at any point on the PPC to

achieve the most efficient condition


ECONOMIC GROWTH

Growing economic results in larger total output and is

shown by an outward shift of PPC

Among the factors for economic growth: • Increases in the quantity of resources supplied

• Increases or improvements in the quality of resources supplied.

• Advances in technology employed in the production or

distribution process.

Assume in an economy with full employment and fixed

resources and technology, the following amounts of

consumer and capital goods can be produced. 1. Construct a production possibil it ies curve.

2. Demonstrate the outcome of new technology created

for producing both goods.


Consumer Goods Capital Goods

0 45

10 40

20 32

30 20

40 0


TEST YOUR UNDERSTANDING :

On the graph, illustrate the effect of a small amount of

unemployment with a point labelled A, and a large

amount of unemployment with a point labelled B.

Point A is slightly to the left of the production

possibilities curve, and point B is further to the left than

point A.


FROM THE TABLE:

1. The opportunity cost of increasing the

production of consumer goods from 20

million to 30 million units is 12 million units

of capital goods (capital goods

decreased from 32 to 20 million units)

2. The opportunity cost of increasing the

production of capital goods from 40 million

to 45 million unit is 10 million units of

consumer goods (consumer goods

decreased from 10 million units to zero).

The circular-flow model is a simple way to

visually show the economic transactions that

occur between households and firms in the

economy.

THE CIRCULAR-FLOW MODEL


Firms Households

Market for

Factors

of Production

Market for

Goods

and Services

Spending Revenue

Wages, rent,

and profit

Income

Goods &

Services sold Goods &

Services

bought

Labor, land,

and capital

Inputs for

production


Households

Buy and consume goods and services

Own and sell factors of production

Firms

Produce and sell goods and services

Hire and use factors of production


Markets for Factors of Production

Households sell

Firms buy

Markets for Goods & Services

Firms sell

Households buy

topic 1 - definition & scope

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