INTRODUCTION TO ECONOMICS

Economics – the study of how individuals and societies make decisions about ways to use scarce resources
to fulfill wants and needs

• Macroeconomics

• The big picture: growth, employment, etc.

• Choices made by large groups (like countries)

• Microeconomics

• How do individuals make economic decisions

ECONOMICS: 5 Economic Questions

Society (we) must figure out:

• WHAT to produce (make)

• HOW MUCH to produce (quantity)

• HOW to Produce it (manufacture)

• FOR WHOM to Produce (who gets what)

• WHO gets to make these decisions?

Resources: The things used to make other goods

SCARCITY: unlimited wants and needs but limited resources

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ANALYZING SCARCITY

• You have to decide how to best use resources to maximize their return. How people
do this generally increases their overall happiness or satisfaction

• The measure of this satisfaction is called a utility.

• Things that make you happy J have high utility

• Those that don’t L, have low utility

• The goal for everyone is to find the best way to allocate-distribute-limited resources
in order to generate the most utility
Because ALL resources, goods, and services are limited
TRADE-OFFS
Wants and Needs • You can’t have it all! (SCARCITY – remember?)
• NEEDS – “stuff” we must have to • You have to choose how to spend your money, time,
survive and energy.

• Food/water, shelter, clothing,  These decisions involve picking one thing over all the
transportation other possibilities – a TRADE-OFF
 A special kind of Trade-Off is an
• WANTS – “stuff” we would really A special kind of Trade-Off is an
 like
OPPORTUNITY
to have COST = OPPORTUNITY COST =
 [Belgeden bir alıntı veya ilginç bir noktanın özetini yazın. Metin kutusunu belge içinde herhangi bir yere
• fancy food, shelter, clothing,
konumlandırabilirsiniz. Kısa alıntı metin kutusunun The Value of the
biçimlendirmesini Next Best
değiştirmek için Choice
Metin Kutusu Araçları
big screen
sekmesini kullanın.] TVs, jewelry,
 conveniences . . . Also known (Ex: Sleeping is the opportunity cost of studying
as LUXURIES for a test)

You can't work and earn money because you

chose to come to school. The money you can't
earn is the cost of your opportunity cost

• Every choice you make comes at a cost, without enough resources,

you are forced to make choices.

• Opportunity cost is their next best choice that you give up in order to
do something else. (The best value given up.)

• Some things have a lower opportunity cost. Ex. go buy a new

jacket or go to the movies.

• Other things have a higher opportunity cost. Ex. Should I buy a car
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or save for College?
• Marginal Benefit -Extra benefit you get from purchasing one more unit of a product

• Marginal Cost -Additional cost of purchasing that extra unit

• Ex. You are at a street fair and purchase one large, chocolate chip cookie for $1.
It tastes so delicious you buy another one, so you’ve spent $2.

• Benefit -Enjoyment both of anticipating the good taste and savoring it.

• How much would you enjoy a third cookie?

• Cost -Additional $1 and sensation of feeling stuffed.

• Reap additional benefits only if the benefits exceeds the costs.

• As long as the marginal benefit of an activity exceeds the
marginal cost, people are better off doing more of it; MB > MC DO IT!
• When the marginal cost exceeds the marginal benefit,
MC > MB DON’T DO IT!
they are better off doing less of it.

• To determine the best level of consumption of a product or

whether to participate in an activity, people must compare
the additional benefits with the additional costs of
consuming or participating a little more or a little less.
4 Factors of Production
• Production is how much stuff an individual,
• LAND – Natural Resources
business, country, even the WORLD makes.
• Water, natural gas, oil, trees (all
But what is “STUFF”?
the stuff we find on, in, and under
• STUFF – Goods and Services. the land)

• Goods – tangible (you can touch it) products • LABOR – Physical and Intellectual
we can buy
• Labor is manpower
• Services – work that is performed for others
• CAPITAL
for a fee
• Physical capital
Incentive
• Human capital
Something that induces a person to act
• ENTREPRENEURSHIP – Investment $$$
Examples:
• Investing time, natural resources,
When gas prices rise, consumers buy more
labor and capital are all risks
hybrid cars and fewer gas guzzling SUVs
3 associated with production
When cigarette taxes increase,
teen smoking falls
CAPITAL

• Capital – Any resource used by humans to make goods and services

• Physical Capital – human made objects used to make goods and services.

• Ex. Buildings, machinery, tools and equipment

• Human Capital –knowledge and skills gained from education and experience; brainpower,
ideas, innovation

• Going to school and learning new skills is an investment

• Reading, working with a computer, and playing a musical instrument

• People with more skills usually earn more money that a person with few skills

BENEFITS OF CAPITAL

• Physical Capital (machines, tools) helps produce goods and services more easily

• Workers become more productive; make more of the product in less time and less money

• Business offer workers extra training (increase human capital); makes them more productive

THREE parts to the Production Process

Factors of Production – what we need to make goods and services

Producer – company that makes goods and/or delivers services

Consumer – people who buy goods and services (formerly known as “stuff”)

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• Capital Goods: are used to make other goods CHANGES IN PRODUCTION

• If we INCREASE land, labor,

• Consumer Goods: final products that are
capital we INCREASE
purchased directly by the consumer production
• Consumption – how much we buy (Consumer • Many entrepreneurs
Sovereignty) invest profit back into
production

• If we DECREASE land, labor,

capital we DECREASE
production

GROSS DOMESTIC PRODUCT (GDP) UNEMPLOYMENT RATE

 A measure of the production of an entire When the

country in one year is GDP Unemployment Rate is
• The total $ value of ALL final goods and high, more people are
services produced in a country in a year. out of work:

MEASURING THE ECONOMY Fewer people earning a

paycheck
Indicators – Economists use a variety of mathematical tools and equation
to measure the health of the economy Fewer people are
Consumer Price Index – Economists use CPI to measure changes in the spending
prices of goods and services
Can lead to a slower
CPI shows whether milk, cars, or houses are more or less expensive from economy
month to month

Inflation – When the average price of goods goes up rapidly

Recession – Economic downturn:

Unemployment to be rising
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Investments falling

GDP decreasing over a long period of time

What is the Production Possibilities Curve? 4 Key Assumptions Revisited

A production possibilities curve (or Only two goods can be produced

frontier) is a model that shows alternative Full employment of resources

ways that an economy can use its scarce
Fixed Resources (4 Factors)
resources
Fixed Technology
This model graphically demonstrates
scarcity, trade-offs, opportunity costs, and
efficiency. What if there is a change?

4 Key Assumptions 3 Shifters of the PPC

• Only two goods can be produced 1. Change in resource quantity or quality

2. Change in Technology
• Full employment of resources
3. Change in Trade
• Fixed Resources (Ceteris Paribus)

• Fixed Technology

Opportunity Cost

1. The opportunity cost of moving from a to b is…

2.The opportunity cost of moving from b to d is…

3.The opportunity cost of moving from d to b is…

4.The opportunity cost of moving from f to c is…

5.What can you say about point G? Unattainable

Two Types of Efficiency

Productive Efficiency-

• Products are being produced in the least

costly way.

• This is any point ON the Production

Possibilities Curve

Allocative Efficiency-

• The products being produced are the ones

most desired by society.
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• This optimal point on the PPC depends on the
desires of society.
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SUPPLY AND DEMAND I: HOW MARKETS WORK
• Supply and demand are the forces that make market economies work.

 Modern microeconomics is about supply, demand, and market equilibrium

 A market is a group of buyers and sellers of a particular good or service.
 The terms supply and demand refer to the behavior of people . . . as they
interact with one another in markets.
 Buyers determine demand.
 Sellers determine supply
 A competitive market is a market in which there are many buyers and sellers
so that each has a negligible impact on the market price.
 Perfect competition
-Products are the same
-Numerous buyers and sellers so that each has no influence over price
-Buyers and sellers are price takers
 Monopoly
-One seller, and seller controls price
 Oligopoly
-Few sellers
-Not always aggressive competition
 Monopolistic competition
-Many sellers
-Slightly differentiated products 8
-Each seller may set price for its own product
 • Market demand refers to the sum of all individual demands for a particular good or
service.

• Graphically, individual demand curves are summed horizontally to obtain the market
demand curve.

Shifts in the Demand Curve

• Change in Quantity Demanded

• Movement along the demand curve.

• Caused by a change in the price of the product.

• Consumer income

• Prices of related goods

• Tastes

• Expectations

• Number of buyers

• Consumer Income

• As income increases the demand for a normal good will increase.

• As income increases the demand for an inferior good will decrease.

• Prices of Related Goods

• When a fall in the price of one good reduces the demand for another good, the
two goods are called substitutes.

• When a fall in the price of one good increases the demand for another good,
the two goods are called complements.

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 SUPPLY AND DEMAND TOGETHER
SUPPLY
Equilibrium refers to a situation in
• Quantity supplied is the amount of a good that which the price has reached the
level where quantity supplied
sellers are willing and able to sell.
equals quantity demanded.
• Law of Supply Equilibrium Price

• The law of supply states that, other things • The price that balances
equal, the quantity supplied of a good rises quantity supplied and
quantity demanded.
when the price of the good rises.
• On a graph, it is the price at
which the supply and demand
curves intersect.
• Supply Schedule
• Equilibrium Quantity
• The supply schedule is a table that shows the
• The quantity supplied and the
relationship between the price of the good
quantity demanded at the
and the quantity supplied. equilibrium price.

• The supply curve is the graph of the On a graph it is the quantity at which
relationship between the price of a good and the supply and demand curves
intersect.
the quantity supplied.

Shifts in the Supply Curve

• Input prices

• Technology

• Expectations

• Number of sellers

Change in Quantity Supplied

• Movement along the supply curve.

• Caused by a change in anything that alters the

quantity supplied at each price.
• A shift in the supply curve, either to the left or
right.
• Caused by a change in a determinant other than
price.

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 • Surplus

• When price > equilibrium price, then quantity supplied > quantity demanded.

• There is excess supply or a surplus.

• Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

• Shortage

• When price < equilibrium price, then quantity demanded > the quantity supplied.

• There is excess demand or a shortage.

• Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward
equilibrium.

• Law of supply and demand

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good
into balance.

Three Steps to Analyzing Changes in Equilibrium

Decide whether the event shifts the supply or demand curve (or both).

Decide whether the curve(s) shift(s) to the left or to the right.

Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity

Shifts in Curves versus Movements along Curves

• A shift in the supply curve is called a change in supply.

• A movement along a fixed supply curve is called a change in quantity supplied.

• A shift in the demand curve is called a change in demand.

• A movement along a fixed demand curve is called a change in quantity demanded.

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SUMMARY

• The demand curve shows how the quantity of a good depends upon the price.

• According to the law of demand, as the price of a good falls, the quantity
demanded rises. Therefore, the demand curve slopes downward.

• In addition to price, other determinants of how much consumers want to buy

include income, the prices of complements and substitutes, tastes,
expectations, and the number of buyers.

• If one of these factors changes, the demand curve shifts.

• The supply curve shows how the quantity of a good supplied depends upon the price.

• According to the law of supply, as the price of a good rises, the quantity
supplied rises. Therefore, the supply curve slopes upward.

• In addition to price, other determinants of how much producers want to sell

include input prices, technology, expectations, and the number of sellers.

• If one of these factors changes, the supply curve shifts.

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