“ Don’t try just do it”

ECONOMICS

Instructor:
Dr. NGUYỄN THỊ THANH THÚY

Chapter 1: Overview of Economics

- Understand the basic concepts of Economics.

- Describe and draw the Production Possibility Frontier

(PPF)

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 1. Definitions

What are your

needs?

1. Definitions

Maslow’s Hierarchy of Needs

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 1. Definitions

1. Definitions

What is ECONOMICS?
 Economics is a social science, which is a study of people
in society and how they interact with each other. It is a
study of rationing systems, it is the study of how scarce
resources are allocated to fulfill the infinite wants of
consumers.
 Scarcity is a concept that describes our needs and desires
beyond the resources available to satisfy them. All goods
and services that have a price are relatively scarce. This
means that they are scarce relative to people, s demand for
them.

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 1. Definitions

Economics

Microeconomics: Macroeconomics:
the study of how the study of
households and economy-wide
firms make phenomena (Incl.
decisions and how inflation,
they interact in unemployment,
markets economic growth)

1. Definitions

Economics

Positive Normative
Economics Economics

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 1. Definitions

Positive Economics
 A positive statement is one that may be proven to be
right or wrong by looking at the facts (objective –
scientific).

 For example: The unemployment rate for China for

2009 was 4,2%.

 Positive economics deals with areas of the subjects that

are capable of being proven to be correct or not.

1. Definitions
Normative Economics
 A normative statement is a matter of opinion and cannot
be conclusively proven to be right or wrong.

 It is usually easy to spot because it uses value-

judgement words such as “ought”, “should”, “too
much”, and “too little”

 For example: The Chinese Government put too little

emphasis on curing rural unemployment in 2009.

 Normative economics deals with areas of the subject

that are open to personal opinion and belief.

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 2. Ten principles of economics

2.1 Trade-offs

To get one thing that

we like, we usually
have to give up
another thing that we
like.
Making decisions
requires trading off
one goal against
another.

2. Ten principles of economics

2.2 Opportunity Cost

Because people face trade-

offs, making decisions
requires comparing the costs
and benefits of alternative
courses of action. Opportunity cost:
whatever must be
given up to obtain
some item

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 2. Ten principles of economics

2.3 Rational people think at the margin

Marginal changes to
describe small
incremental
adjustments to an
existing plan of action.
A rational decision
maker takes an action
if and only if the
marginal benefit of
the action exceeds the
marginal cost.

2. Ten principles of economics

2.4 People respond to incentives

An incentive is something that

induces a person to act, such as the
prospect of a punishment or a
reward.
Because rational people make
decisions by comparing costs and
benefits, they respond to
incentives.

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 2. Ten principles of economics

2.5 Trade can make every better off

Trade between
two countries can
make each country By trading
better off with others, people
can buy a greater
variety of goods and
services at lower cost.

2. Ten principles of economics

2.6 Markets are usually a good way to

organize economic activity

Market economies have Prices adjust to guide

proven remarkably
successful in organizing
economic activity to
promote overall
economic well-being.
individual buyers and sellers
to reach outcomes that, in
many cases, maximize
the well-being of society as
a whole. (Invisible hand)

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 2. Ten principles of economics

2.7 Government can sometimes improve

market outcomes

The invisible hand can work its magic only if the

government enforces the rules and maintains the
institutions that are key to a market economy.

The government intervenes in the economy: to

promote efficiency (prevent market failure) or to
promote equality

2. Ten principles of economics

2.8 A country’s standard of living depends on
its ability to produce goods and services

Citizens of high-income countries have more TV sets,

more cars, better nutrition, better healthcare, and a
longer life expectancy than citizens of low-income
countries.

Almost all variation

in living standards
is attributable to
differences in
countries’
productivity

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 2. Ten principles of economics
2.9 Prices rise when the government prints too
much money

When a government creates large quantities of

the nation’s money, the value of the money falls.

Inflation, an
increase in the
overall level of
prices in the
economy.

2. Ten principles of economics

2.10 Society faces a short-run trade-off between
inflation and unemployment
Increasing the amount of money in the economy
stimulates the overall level of spending and thus
the demand for goods and services.

Higher demand may over time cause firms to

raise their prices, but in the meantime, it also
encourages them to hire more workers and
produce a larger quantity of goods and services.

More hiring means lower unemployment.

One final economy-wide trade-off: a short-run

tradeoff between inflation and unemployment.

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 3. Basic concepts

3.1 Three basic economic questions

What to produce?

How to produce?

For whom to produce?

3. Basic Concepts
3.2 Rationing systems

• Decisions as to what to produce, how to

Planned produce, and who to produce for, are made by
economies a central body, the government.

• All production is in private hands and demand

Free market and supply are left free to set wages and
economies prices in the economy.

• Decisions as to what to produce, how to

Mixed produce, and who to produce for, are made by
economies both the government and private sectors

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 3. Basic Concepts
3.2 Rationing system

Your opinions
about those
systems?
Which system
does Vietnam
join in?

3. Basic Concepts

3.3. PPF – Production Possibility Frontier

The Circular Flow of Economic Activities

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 3. Basic Concepts

3.3. PPF – Production Possibility Frontier

The production possibility frontier (PPF) is a curve
depicting all maximum output possibilities for two goods,
given a set of inputs consisting of resources and other
factors. The PPF assumes that all inputs are used
efficiently.
Assumptions: - There are only 2 goods
- Given resources and other factors
Example: Cases Foods Clothes
A 0 300
B 5 280
C 9 240
D 12 180
E 14 100
F 15 0

3. Basic Concepts

3.3 PPF – Production Possibility Frontier

Clothes 350

A
300 B
C
250 H

200
D
G
150

100
E

50

F
0
0 2 4 6 8 10 12 14 16
Foods
Production Possibility Frontier

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 3. Basic Concepts

3.3 PPF – Production Possibility Frontier

Clothes 350

A Unattainable point
300 B
C
250 H

200
D Efficient point
G
150

100
E
Inefficient point
50 Attainable point
F
0
0 2 4 6 8 10 12 14 16
Foods

3. Basics Concepts

Characteristics of Production Possibility Frontier (PPF)

A technology
advancement

Supply of factors
of production
increases

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 3. Basics Concepts

Characteristics of Production Possibility Frontier (PPF)

- Opportunity cost is measured in the number of units of the

second good forgone for one or more units of the first good

Bowed-out
shape

A common PPF: increasing opportunity cost

“ Don’t try just do it”

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