Economics: An Introduction

Economics is the study of how societies use scarce resources to produce valuable commodities
and distribute them among different groups. (Paul Samuelson)
Basic Concepts
Macroeconomics - the field of economics that deals with the study of why the aggregate
rate of utilization of resources in the economy varies over time and its constitu-
ent problems: specifically unemployment, inflation and economic growth..
Microeconomics - the field of economics that deals with individual decision-makers,
particularly consumers and firms, and their responses to changes in laws, the
invention of new technologies and changes in the availability of resources.
Scarcity - in the economic sense, refers to the basic fact of life that there exists only a
finite amount of human and non-human resources, which the best technical
knowledge is capable of using to produce only limited maximum amounts of
each economic good.
Pitfalls in Economic reasoning:
Failure to keep "Other things equal" .. (Cateris Paribus) -- The multi-variate
(meaning, many variables) nature of economic realities may indeed make it
difficult for us to comprehend, yet to experiment upon these to understand it
further requires us to isolate a variable and see how it affects the whole.
This variable should have levels or degrees of distinction. The doctrine of
cateris paribus "All other things remaining the same" , is therefore an
essential foundation in economic reasoning.
Post hoc Fallacy -- to conclude that some event A caused a later event B just because
that A was observed before B occurred. (e.g. concluding that the common
cold is caused by the weather turning colder.)
Fallacy of composition -- what is true for the part is true for the whole.
Subjectivity -- the distinction between the observer and the observed, and how different
observing points vary the way an object is perceived, and thought about.
This is a major reason why interpretation disagreements occur, though it is
not the only one. Though this is not necessarily a pitfall in reasoning, we
also cannot be without it.
Economics is used in understanding our personal consumer lives, in commercial decision-
making, in understanding society, and in governing society. This understand-
ing is the basis for better decision-making on both micro- and macro- levels.
Positive vs Normative Economics -- Positive economics describes the facts and behavior
of the economy, usually in indisputable quantities and figures (e.g. what
percentage of the population is earns below P 36,000 a year ? ). Normative
economics involves ethics and value judgements, of how things should be.
Normative economics deals with questions that are resolved by political
decisions, and not by economic science.
Factors of Production -- resources used to produce goods and services to satisfy wants.
Usually easily recalled as inputs. (Ex) land, labor and capital.
ECONOMY lecture notes: Introductory Concepts p 1 of 2
Production Possibility Frontier -- the limits on a graph that shows which alternative
combination of commodities can just be obtained if all available productive
resources are used. It distinguishes between attainable and unobtainable
combinations.
Each table uses 4 board ft of wood, while each chair uses 2 board ft. If an
imaginary island economy only has a total of 320 board ft of wood, show the
production possibility frontier on a 2-D graph
160 0 E
120 20 D
80 40 C
40 60 B
0 80 A
Chairs Tables Possibility

80
60
40
20
0
0 40 80 120 160
Tables
Chairs
Opportunity Cost -- synonymous with cost. The highest valued option that is forgone
when an action or decision is undertaken.
In the island economy shown in the graph above, if the decision was made to
produce 30 tables and 60 chairs, there would be an amount of wood that is not used.
(80 board ft )
1
.
Suppose (a) that the economy can absorb all possible amount of wood if it
has been turned into either tables or chairs, and
(b) that any wood that was not used to make tables and chairs are
discarded and are completely worthless.
Then :
From an economic point of view, the complete utilization value of
320 board ft of wood was not realized, and the opportunity cost is 320 board ft.
To economists, cost is always what a person (or island economy) must give up
or forgo, in order to consume something or pursue some activity The cost of any
activity is the highest valued opportunity that one forgoes when he or she pursues that
activity.
In the same way, the cost of producing 30 tables and 60 chairs is not the usage
of 240 board ft., with the windfall excess of 80 wood units, it is the production
possibilities of 320 units that the island economy could have consumed if the decision
was made to produce at the production possibility frontier. Cost means alternative
cost.
ECONOMY lecture notes: Introductory Concepts p 2 of 2
1
Total available less Total used =
= 320 - [30(4) + 60 (2)]
= 320 - 240
= 80 board ft.