Economics - Oikos (House) ; Nomos (Custom or Law) - Study of how societies use scarce resources to produce valuable commodities

and distribute them among different people - Two Key Ideas in Economics 1. Goods are Scarce 2. Society must use its resources efficiently

Two Major Branches of Economics 1. Microecomics

- Is concerned with the behavior of individual entities such as market, firms, and households

2. Macroeconomics
- Views the performance if the economy as a whole

Logic of Economics - Economists use scientific approach to understand economic life

- Historical data - Statistics - Economic Theories - Econometrics

- Some fallacies in economic reasoning

- Post hoc fallacy - Failure to hold other things constant (ceteris paribus) -Fallacy of composition

Three Problems of Economic Organization 1. What commodities are produced and in what quantities? 2. How goods are produced? 3. For whom are goods produced?

Market Economy one in which individuals and private firms make the major decisions about production and consumption - e.g. laissez faire economy

Command Economy one in which the government makes all important decisions about production and distribution
Mixed Economy one with elements of market and command

Inputs - aka factors of production - commodities or services that are used to produce goods and services - land, labor and capital Output are various useful goods or services that result from production process and are either consumed or employed in further production - labor-intensive or capital-intensive

production-possibility frontier (PPF) shows the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quality of inputs available - represents the menu goods and services available to society
Alternative Production Possibilities Butter Possibilities A B C D E of pounds) 0 1 2 3 4 (in mio Guns 15 14 12 9 5 (in thousands)

The Production Possibilities in a Graph

A Smooth Curve Connects the Plotted Points

Economic Growth Shifts the PPF Outward

Economies Must Choose Between Public Goods and Private Goods

Investment for Future Consumption Requires Sacrificing Current Consumption

Opportunity Costs cost of forgone alternative Production Efficiency occurs when an economy cannot produce more of one good without producing less of another good; this implies that the economy is on its productionpossibility frontier

End