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Chapter 1: Introduction
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Learning Outcomes
Define “Economics”.
Explain the different Economic categories.
List and describe the types of resources.
Explain key Economics concepts
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Learning Outcomes
Define the production possibilities curve(PPF).
Plot and explain the types of PPF.
Use the PPF to explain the seven basic
Economic concepts.
List and explain the three types of economicsystem.
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Building A Definition of Economics
~Goods and Bads ~
Utility- The satisfaction one receives froma good.
Disutility - The dissatisfaction onereceives from a bad.
Good - Anything that gives a personutility or satisfaction (tangible orintangible goods). i.e. Computer.
Bad – Anything that gives a persondisutility or dissatisfaction. i.e. Flu.
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Building A Definition of Economics
~ Resources ~
• The production of all goods and services
requires the resources.
- Resources – the input or factors of production.• Four (4) categories of resources:
1) Land.
2) Labour.3) Capital.
4) Entrepreneurship.
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Building A Definition of Economics
~ Resources ~
1)Land- All natural resources, such as minerals,forests, water, and unimproved land.- i.e. oil, wood.
2) Labor
- The physical and mental talents peoplecontribute to the production process.
- i.e. a person building a house.
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Building A Definition of Economics
~ Resources ~
3)Capital - Produced goods that can be used as inputs forfurther production.
- i.e. factories, machinery, tools, computers, and buildings.
4) Entrepreneurship
- The particular talent that some people have for: i) organizing the resources of land, labour andcapital to produce goods.
ii) seeking new business opportunities. iii) developing new ways of doing things.
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Economics, the Science of Scarcity
- The science of how individualsand societies deal with the fact
that wants are greater than thelimited resources available to
satisfy those wants.
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Key concepts:
1) Scarcity
2) Opportunity cost.3) Unintended effect.
4) Exchange/ trade.
Key Concepts in Economic
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Scarcity
• The condition in which our wants are greater thanthe limited resources (i.e. land, labour, time and etc)available to satisfy those wants.
• Scarcity is our infinite wants for goods hitting up
against finite resources• i.e. we want goods, but there are just not enoughresources available to provide us with all the goodswe wants.
• Three (3) effects of scarcity:1) the need to make choices.
2) the need for rationing device.
3) competition.
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Scarcity
1)Choices
•) People have to make choices because ofscarcity.
•) We must choose which wants we willsatisfy and which we will not.
•)i.e. Do I go to Bali for holiday? Or Do Ipay off my car loan earlier?
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Scarcity
2) Rationing Device• A means for deciding who gets what ofavailable resources and goods.
3) Competition
• Competition exists because of scarcity.
• Because goods are limited, individualscompete to obtain the goods that areavailable, and studying this competitive
process is what an economist does.
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Self Test Questions
1.Scarcity is the condition of finiteresources. True or false? Explain youranswer.
2.How does competition arise out ofscarcity?
3.How does choice arise out of scarcity?
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Key Concepts in Economic
Opportunity cost• The most highly valued opportunity oralternative forfeited when a choice is made.
• The higher the opportunity cost of doingsomething, the less likely it will be done.
• i.e. The opportunity cost of reading the
chapter is the value of what is forgone – thismight be measured in the lost income for astudent who could be working at a job, or alost hour of watching television or a forgone
nap.
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Key Concepts in Economic
Exchange/Trade
• The process of giving up one thing for
another.• People enter into
exchanges to make
themselves betteroff.
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Key Concepts in Economic
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Economic Categories
Two (2) economic categories are:
1)Positive economics vs Normative
economics.2)Microeconomics vs Macroeconomics.
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Economic CategoriesPositive vs. Normative Economics
1)Positive economics•) The study of “what is” in economic
matters.•) Deal with cause-effect relationships thatcan be tested.
•) i.e.What isthe effect of a cut in incometaxes on unemployment rate?
Cause Effect
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Economic CategoriesPositive vs. Normative Economics
2) Normative economics• The study of “what should be” in economicmatters.
• Deal with value judgments and opinionsthat cannot be tested.
• i.e. The income taxesshould becut becausethe income tax burden on many taxpayers iscurrently high.
Judgmentand Opinion
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Economic CategoriesMicroeconomics
Microeconomics deals with human behavior and choices as they relate to
relatively small units—an individual,a business firm, an industry, a singlemarket.
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Economic CategoriesMicroeconomic Questions
~ How does a market work?
What level of output does a firm produce?
What price does a firm charge for the good itproduces?
How does a consumer determine how much of agood he or she will buy?
Can government policy affect business behavior?
Can government policy affect consumer behavior?
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Economic CategoriesMacroeconomics
Macroeconomics deals with human behavior and choices as they relate to
highly aggregate markets (e.g., thegoods and services market) or theentire economy.
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Economic CategoriesMacroeconomic Questions
How does the economy work?
Why is the unemployment rate
sometimes high and sometimes low?What causes inflation?
Why do some national economiesgrow faster than other nationaleconomies?
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Wall Street Journal
The Wall Street Journal is a is a rich sourceof information which provides real lifeexamples of micro- and macro economic
activities. Check today’s issue to see themost current news.
http://www.wsj.com
http://www.wsj.com/http://www.wsj.com/
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Other Useful Sources of CurrentEconomic News
New York Timeshttp://www.nytimes.com/pages/business/index.html
Financial Timeshttp://www.ft.com/home/us
The Economisthttp://www.economist.com/index.html
http://www.nytimes.com/pages/business/index.htmlhttp://www.ft.com/home/ushttp://www.economist.com/index.htmlhttp://www.economist.com/index.htmlhttp://www.ft.com/home/ushttp://www.nytimes.com/pages/business/index.html
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Economic Activities
Two (2) types of economic activities:
1)Producing.- Production possibilities frontier (PPF).
2)Trading. - Exchange and trade.
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Economic Activities:Production Possibilities Frontier
PPF:• Represents thepossible combinations of twogoods that can beproduced in acertain periodof time under the conditions of agiven state
of technology and fully employed resources.
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• Two (2) types of PPF:
1)TheStraight Line PPF – constantopportunity costs.
2) TheConcavedownward PPF – increasing
opportunity costs.
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Production Possibilities FrontierConstant Opportunity Costs
• Opportunity costs of 1 TV = 1 computer.• Opp. Costs between TV and Computer isconstant.
• i.e. Point A to B => 10k computers (from50k to 40K)not produces but 10k TV set
are produce; ratio is 1:1.
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Production Possibilities FrontierIncreasing Opportunity Costs
• As more of one good is produced, the opp. costs between computers and TV sets changes.• As the economy produces more TV sets, theopp.costs of producing TV sets increases.i.e.
Point A to B => opp. cost of 1 TV = ½ computers.Point B to C => o . costs of 1 TV = ¾ com uters.
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Production Possibilities FrontierLaw of Increasing Opportunity Costs
Law of Increasing Opportunity Costs•Asmore of a good is produced, the
opportunity costs of producing thatgoodincrease.
• must employ resources which are less
efficient and/ or appropriate whenincreasing production.• In real world, most PPF lines are concavedownward.
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Increasing Opportunity Costs
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Production Possibility FrontierFramework for Understanding
P d ti P ibilitF ti
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Production Possibility FrontierFramework for Understanding
1)Scarcity•) Wherewants (for goods) are greater than theresources available to satisfy those wants.
•) Scarcity implies that some things areattainable.
- Attainable
– consists of thepoints on the PPF and all pointbelow PPF.
- i.e. Point A to point F.-Unattainable
- consists of thepoint above and beyond the PPF.
- i.e. Point G.
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Production Possibility FrontierFramework for Understanding
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Production Possibility FrontierFramework for Understanding
2) Choice Individuals mustchoose the combination of thetwo goods they want to producewithin theattainable region.
i.e. Combination of point A or point B or point C.
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3) Opportunity Costs
-Thevalue of the best alternative forgone when a choice is made.
Move from one point to another on thePPF.
i.e. Point A to point B => Opp. Cost of 1car = ½ TV sets.
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Production Possibility FrontierFramework for Understanding
4) Productive Efficiency
•The condition where the maximum output isproduced with given resources and technology.
• Lie on PPF ( Point A – B – C – D).
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5) Productive Inefficiency• The condition where less than themaximum output is produced with given
resources and technology.• Productive inefficiency implies that moreof one good can be produced without any
less of another good being produced.
• Lie inside the PPF (Point F).
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Production Possibility FrontierFramework for Understanding
6) Unemployment
• Resources are unemployed when it isnot producing
the maximum output with the available resources
and technology (productive inefficiency).
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7) Economic growth
• An increase in resources (i.e. a newdiscovery of resources) or anadvance intechnology can increase the productioncapabilities of an economy, leading toeconomic growth andshift outward in
the production possibilities frontier.
ProductionPossibilityFrontier
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Production Possibility FrontierFramework for UnderstandingEconomic Growth: Advanced Technology
An advance intechnology commonly refers to
theability to producemore output with afixed amount of
resources OR theability to produce thesame output with
fewer resources.
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Economic Systems
Economic System: the way in which societydecides to answer key economic questions—inparticular those questions thatrelate to
production andtrade.There are hundreds of countries butonly TWOmajor economic systems.
We refer to these two major systems asSocialism andCapitalism.
Most Countries have Chosen Elements fromBOTHeconomic systems.
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Mixed Capitalist Economies
An economic system characterized bylargely private ownership of factors ofproduction, market allocation of
resources, and decentralized decisionmaking. Most activities take place in theprivate sector in this system, butgovernment plays a substantial and
regulatory role.The United States has a Mixed CapitalistEconomy.
E S dh PPF
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Economic Systems and the PPF:Who Decides Where the Economy Will Operate on thePPF?
Capitalist:
TheMarket DecidesSocialist:
TheGovernment
Decides
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How Will The Goods Be Produced?
Capitalism: decided byprivate producers.
Socialism:government plays alarge part in deciding
what is produced.
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For Whom Will The Goods BeProduced?
Capitalism:goods will be produced forthosepersons who are able and willing to
pay the prices for the goods.Socialism:moregovernment control overwho gets what goods.
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Trade
Capitalism: bothparties benefit from the
trade.Socialism:trade isviewed asmaking one
person better off at theexpense of anotherperson.
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Prices
Capitalist :
Prices ration goods andservices
Prices convey informationPrices serve as anincentiveto respond to information
Socialist :Price is viewed as beingset by greedy businesses withvast economic power