What Economics is About?

Ch 1, Economics 9 e, Roger A. Arnold

An Introduction

Economics is a social science (where we want to study and

understand the human society)
Every human society (e.g. any country or city) faces the
problem of scarcity
scarcity: human wants are greater than the resources available
to satisfy those wants
e.g. 1000 people want cars but there are only 500 cars
available (example continued next slide)
Scarcity’s Effects
The following are the effects of scarcity (example from last slide):
1) We need to make choices or decisions. E.g. We have to choose who
will get the 500 cars (out of the 1000 people).

2) Rationing device – A way of deciding who gets the available limited

resources. E.g. ‘price’ can be a rationing device. Only those people who
can pay the price of the car will get the car.

3) Competition. E.g. People will compete to get those 500 cars.

Continued
Economics is defined as the science of scarcity i.e. the study of how a
society and individuals tackle the problem of scarcity
A society that seeks to tackle and manage the problem of scarcity is
called an economy
An economy is made up of mainly three sectors or actors:
1) consumers or households or individuals 2) firms or businesses or
organizations 3) the government
In Microeconomics we study and try to explain the decision-making of
households and businesses and their interaction in a market.
In Macroeconomics we focus on the aggregate or total economy: all the
households and (or) business and the government
Goods and Bads
Goods and services (e.g. A car, food, clothes, home, education) i.e. things that make
us happy, give us satisfaction or benefit

The economic term for happiness or satisfaction or benefit is utility

We are willing to pay for goods

Bads - Anything from which individuals receive disutility (i.e. dissatisfaction)

We are willing to pay for the removal of bads (e.g. we pay the garbage man)

Who makes the goods? Using what?

Resources or Inputs or Factors of Production
Goods (and services) are produced by firms or businesses. They are
made using inputs or factors of production. Which are:
• Land – All natural resources, e.g. minerals, forests, water, air etc.
• Labour – Physical and mental effort of workers in the production
process
• Capital – Produced goods that can be used as inputs in the production
process, e.g. factories, machines, computers
• Entrepreneurship – The talent for organizing the above mentioned
resources to produce goods. E.g. The CEO or Chairman
The skills and knowledge regarding the use of resources is Technology
Opportunity Cost and Behaviour
Opportunity cost is the next best alternative (or option) forgone (or sacrificed) when
we make a choice or decision

E.g. You made a decision to read this slide. If you were not reading this slide, what
would you be doing? May be you would be spending time with your family. ‘Spending
time with family’ is the opportunity cost here (you are sacrificing this option).

Changes in opportunity cost affect behaviour

The higher the opportunity cost of doing something, the less likely it will be done. E.g.
Your favourite relative has come to visit your home. If you read this slide you will be
giving up spending time with him or her. The opportunity cost has increased and you
are less likely to read the slides.
Decision Making (Comparing Benefits and
Costs)
One effect of scarcity is that we have to make decisions.
How is a decision made? According to economic theory, we make
decisions by comparing benefits and costs. If benefits are greater than
the costs (benefit > costs) then we may choose to do something.
For example, you chose to undertake university education since,
benefit of university education > cost of university education.
Think about the benefits and costs of studying at NSU.
Opportunity cost is a cost and hence it is included in the cost-benefit
analysis. For example you could have worked instead of studying at
NSU. Then the salary (benefit) from work is a cost of studying at NSU.
Efficiency
In economics or business or in daily life we want to make the best choice (or
decision) or we want to obtain the maximum benefit from a given situation. That is
we want to be ‘efficient’. For example, a student can choose CSC, EEE or BBA as his
or her major? Which one will (s)he choose? The one that gives him or her the
maximum benefit (e.g. The highest GPA or the highest paying job or more
satisfaction)

Incentive
Something that makes us undertake an activity. E.g. A student might study very
seriously for a tuition waiver. The tuition waiver is the incentive for studying
seriously. Incentives affect the behaviour of the individuals. Without the tuition
waiver (incentive) the student may not study very seriously. In Economics, incentive
can be a reward (e.g. bonus marks) or punishment (e.g. a fine).
Exchange or Trade
Trade: ‘The giving up of one thing for something else’

E.g. we may ‘give up’ 6 taka for a cup of tea at a tea-stall. A trade has
usually two sides: The buying side and the selling side.

People engage in trade or exchange because they expect to be

better-off (happier or more satisfied) after the trade
That is, the benefit from the trade > cost of the trade. Trade takes place
in a market (Ch 3)
Theory or Model
An abstract (simple) representation of the real world designed with the
intent to better understand it or explain it. The simplification can be
done using assumptions.

In a theory or model we focus only on the variables that are the main
or critical ones needed to explain an activity or event.

A good theory accurately predicts real world phenomenon. When a

theory becomes widely accepted (or it is very accurate at predicting
real word events) it may become a law. E.g. the law of gravity
Ceteris Paribus
Means “All other things constant” or “Nothing else changes”
This assumption is essential when we want to study and determine the
correct relationship between two variables (see Appendix A of Ch 1).

For example, someone may say that if the price of pen increases then
the number of pens people buy will decrease. But this is only true if
we assume ceteris paribus. Since, we are assuming that price of
pencil, income of people are remaining constant. Otherwise the
statement may not be true. E.g. if the price of pen increases and the
income of people increases as well…then the number of pens that
people buy might not decrease.
Appendix A (Ch 1)
In a model or theory we might be interested to study of the relationship
between different variables. There are three possible relationships
between two variables:
Directly (Positively) Related: Two variables are directly related if they change
in the same way (they both increase or decrease together). E.g. Hours of
study ↑ then CGPA ↑ or study hours↓ then CGPA ↓.
Inversely (Negatively) Related: The variables change in opposite ways. E.g.
hang-out with friends ↑ then CGPA ↓ or hang-out ↓ then CGPA ↑.
Independent: Variables are not related. If one changes the other does not
change. E.g. temperature on Moon and your CGPA are independent (not
related).
Continued
The relationship between two
variables can be represented using
graphs. Usually, we place the
dependent variable on the y-axis and
independent variable on the x-axis. If
the variables are directly (positively)
related we will have an upward
sloping graph.
In case of a negative relationship In case of independence
we will have a downward we might have a vertical
sloping graph (as below) or horizontal line (as below).