ECN 104 Lecture Notes - Mira-Bhayandar Municipal Corporation, Capital Good, Opportunity Cost
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ECN104 Notes 2012 Alvina Gilani
Economics is the social science concerned with the efficient use of
scarce resources to achieve the maximum satisfaction of economic
Ceteris Paribus (Other Things Equal): It is assumed that all other variables
except those under immediate consideration are held constant for a
Microeconomics focuses on the individual parts of the economy.
Macroeconomics looks at the economy as a whole.
Positive statements are statements that attempt to
describe the world as it is
Normative statements are statements about how the world should be:
Two Fundamental Facts together constitute the economic problem and
provide foundation for economics:
1‐) Society’s wants are unlimited and insatiable
2‐) The resources for producing goods and services are scarce.
Utility: the satisfaction or pleasure a consumer obtains from the
consumption of a good or service.
Budget Line: finite amount of income (let say $120) to be distributed over
two goods (DVD and Book)
Economic resources: all natural, human, and manufactured resources that
go into production of goods and services.
Property resources: land, property, buildings, investmentsj
Human resources: Labour: all physical and mental talents and efforts of
individuals used in production
These four resources are called the factors of production.
Land ← Rent
Capital ← Interest
Labour ← Wage
Entrepreneurial Ability ← Profits or Loss
Capital goods vs. Consumer Goods
Consumer goods satisfy wants directly while capital goods do so indirectly by
aiding the production of consumer goods.
Two kinds of efficiency:
Productive Efficiency: production of goods and services in the least costly
Allocative Efficiency: production of goods and services most wanted by
Law of Increasing Opportunity Cost
Opportunity Cost: The amount of
other products that must be
sacrificed to obtain one of specific good
Opportunity cost increases with amount produced:
As we make more
pizzas, the # of robots we have to give up (per pizza) increases
Marginal Benefit: the extra benefit associated with consuming one more
Marginal Cost: the extra opportunity cost of that extra unit
Resources are being efficiently allocated when MB=MC.
If MB>MC, too few is produced
If MC>MB, too many is produced
2 ECONOMIC SYSTEMS:
o Private individuals and firms own land and property resources
o Entrepreneurs and businesses have the right to obtain
resources to produce goods and services
o Businesses have freedom of choice to operate – minus legal
o Specialization: the use of resources of an individual/region
or nation to produce one or few goods/services rather than
the entire range of goods and services
o market system, consumers are in command in determining
the types and quantities of the goods produced
Three special merits of the market system:
o Efficiency: market system promotes efficient use of
resources, production of goods and services most wanted by
the society and adoption of new and more efficient production
o Incentives: Market system encourages skill acquisition, hard
work and innovation
o Freedom: Freedom of enterprise and choice
The most efficient production technique depends on:
‐ The available technology
‐ The prices of the needed resources
the invisible hand: owners and sellers acting independently in the market.
The Command System
o Land and property are owned by the government, economic
decision making is done by the government – it is a
representation of communism or capitalist government.
o The problem with command system is that multiple entities
making decisions and bad coordination among them leads to
a final bad chain reaction
o The Incentive Problem: no fluctuation in prices or profits to
signal and no response to shortage and surplus
Diminishing Marginal Utility: In any specific time period, each buyer of a
product will derive less satisfaction (or benefit, utility) from each successive
unit of the product:
Income Effect: indicates that a lower price increases the purchasing power
of a buyer’s money income. This enables the buyer to purchase more of the
products than she or he could buy before.
Substitution Effect: suggests that, at a lower price, buyers have the
incentive to substitute what is now less expensive product for similar
products that are now relatively more expensive
Determinants of demand
number of buyers
prices of related goods