ECMA Notes – Chapter 1
• An economy is a system in which scarce recourses such as labour, land and
machines are allocated among competing users.
• Therefore decisions must be made about: what goods are produced, and
which are not; who works where and at what wage; and who consumes which
good at what times.
• Efficiency means that the resources available to the nation are organized so
as to produce the largest possible amount of the goods and services that
people want to purchase and to produce them with the least amount of
• Free market: those who produce, sell, and buy goods and services all
respond to the same set of prices, which are determined in markets that
respond to overall conditions of national scarcity or plenty.
• Characteristics of market economies:
o Self-interest: individuals pursue their own self-interest, buying and
selling what seems best for themselves and their families.
o Incentives: sellers usually want to sell more when prices are high,
buyers usually want to buy more when prices are low.
o Market prices and quantities: when would-be sellers compete to sell
their products to would-be buyers
o Institutions: governed by a set of institutions largely created by
government. Such as property, freedom of contract, and the rule of law
• Scarcity: compared to the known desires of individuals for such product as
better food, clothing, housing, education, holidays, health care, and
entertainment the existing supplies of resources are clearly inadequate.
• If we cannot have everything we want, we must choose what we will and will
• Economics: is the study of the uses of scarce resources to satisfy unlimited
• Economists call such resources factors of production because they are
used to produce the things that people desire.
• Goods: are tangible (e.g. cars and shoes) and services: are intangible (e.g.
haircuts and education)
• The act of making goods and services is called production.
• Because resources are scarce, all societies face the problem of deciding what
to produce and how much each person will consume.
• Every time a choice is made, opportunity cost is incurred
• The opportunity cost of resources for a certain purpose is defined to be the
benefit given up by not using them in the best alternative way. It is the cost
measured in terms of other goods and services that could have been
Production Possibility Frontier
• Because resources are scarce, some combination cannot be attained. The
negative slope on a graph divides the combinations that can be attained to
those that cannot.
• Points above and to the right of the curve cannot be attained because there
are not enough resources; points below and to the left of the curve can be attained without using all of the available resources; and points on the curve
can just be attained if all the available resources are used efficiently. This is
called the production possibility frontier
• Production possibility frontier: a curve showing which alternative
combinations of commodities can just be attained if all available resources
are used efficiently; it is the boundary between attainable and unattainable
• it illustrates three concepts: scarcity, choice, and opportunity cost
• scarcity: indicated by unattainable combinations outside the boundary,
choice: by the need to choose a