Chapter 1: What is Economics?
Define economics and distinguish them between micro and macro – economics
- Economics is the social science that involves using the limited resources to satisfy
unlimited human wants
o All economic questions arise because we want more than we can get.
This is called scarcity. Scarcity forces us to make choices. Our choices
are influenced by incentives.
- While MICROeconomics deals with choices by individuals and businesses,
MACROeconomics deals with choices of nations.
What are the two big questions of economics?
- How do choices determine what, how, and for whom goods and services are
produced, and in what quantities?
o What one country makes varies and changes over time. Different countries
specialize in different products and therefore produce mainly that product.
o How a good is produced is by using the Factors of Productions
Land (Rent produces income)
Labour (Wages produces income)
Capital (Interest produces income)
Entrepreneurship (Profit produces income)
o For whom the goods are produced for depends on the incomes that people
earn. Large income families can buy a wide range while low income families
can only buy essential needs
- How can choices made for self-interest also promote social interest?
o The government steps in and provides laws that act as incentives to promote
social interests while one pursuits self-interest.
Economic Way of Thinking
- Every choice is a trade off
o You are always giving up something in order to obtain something else
- Everything must be rational
o After comparing the benefit and cost, the choice that obtains the greatest
benefit over lowest cost
- Benefit – What you gain
o Everyone’s preferences are different and since benefit is the gain that brings
pleasure, benefit varies
o The opportunity cost is something else you had to give up in order to obtain
that good or service.
Opportunity cost has two components:
Things you can’t afford to buy if you purchase (i.e concert ticket)
Things you can’t do with your time spent (i.e if you go to that concert) o Marginal Benefit is the benefit you obtain by pursuing an incremental
increase in an activity
o Marginal Cost is the additional opportunity cost you experience by pursuing
an incremental increase in an activity
Economics as a Social Science and Policy Tool
- Positive statements are statements about “what is”.
o Can be tested by checking them against facts
- Normative statements are statements about “what ought to be”
o They are beliefs and therefore cannot be tested or convinced with facts
- Economic Models are a simplified description of the economic world that includes
only features needed for the purpose of explaining it
- Exogenous Variable is a variable whose value is given in a model.
- Endogenous Variable is a variable whose value is determined within the model
These tools are useful for personal decisions, advising businesses and the government on
- Horizontal line is the x-axis, vertical line is the y-axis, (0,0) is the origin
- Positive (DIRECT) Relationships are when variables move in the same direction
o Slope is positive
- Negative (INVERSE) Relationships are when variables move in opposite directions
o Slope is negative
- Unrelated (INDEPENDENT) Relationships when variables are constant
o Slope is non-existent; horizontal or vertical line on the graph
Slope is the “change in” the graph. Therefore, it would be the ΔY/ΔX
For Linear graphs, the slope at each point is the same
For Curve graphs, the slope at each point is different
Chapter 2: The Economic Problem
- Production Possibility Frontier (PPF) is the boundary between unattainable and
attainable production possibilities o There are multiple points on the PPF that are considered production
Efficiency being the production of the highest possible output from
the available resources
o Points inside the PPF are attainable but are considered to be inefficient
o Points outside the PPF are unattainable and are considered to be impossible
- Opportunity cost is a ratio of the decrease in the quantity produced of one good
divided by the increase in the quantity produced of another good as we move along
- When the shape is of a right side of a hill, that is due to the resources not being
equally productive in all activities
o Resources most suitable for that activity are to be use first
- When the shape is of a y = 1/x function, it shows increasing opportunity cost
- When moving along the line of the PPF, you must give up one of the resources to
obtain the other resource; therefore the opportunity cost of additional X is the
amount of Y you had to give up
Using Resources Efficiently
- Marginal Benefit is the benefit from consuming one more unit of a good
o Marginal Benefit Curve slopes downward because of the decreasing marginal
- Marginal Cost is the opportunity cost of producing one more unit of a good
o Marginal Cost Curve slopes upwards because of the increasing marginal cost
- NOTE: There are two ways of using the Marginal Benefit/Cost so do not be confused!
It can be interpreted differently in terms of basic and PPF version
- Is the expansion of the PPF (movement of the graph to the right)
- It is moves when there are changes in resources or technology (the FOP)
- Economic Growth is only achievable in the future if we consume less products today
Gains from Trade
- Production increases if people specialize in the activity that they have the
comparative advantage in
o Comparative advantage is when someone producing a good can produce it at
a lower opportunity cost than anyone else
o Absolute advantage is when someone producing a good uses the same
quantity of resources and produces more than anyone else