CHAPTER 1

Introduction to
Economics
Learning Outcome
1. Define economics and distinguish
between microeconomics and
macroeconomics
2. Discuss basic economic concepts
3. Discuss the economic systems

LETS GET STARTED

 Study of Economics
• All economic questions arise because
we want more than we
can get.
• Our inability to satisfy all our wants is
called scarcity.
• Because we face scarcity, we must make
choices.
• The choices we make depend on the
incentives we face.
• An incentive is a reward that encourages
an action or a penalty that discourages an
action.
 Definition of Economics

Economics is the social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with
scarcity and the incentives that influence and reconcile those choices.

Economics divides in two main parts:

 Microeconomics
 Macroeconomics
 Definition of Economics
Microeconomics
Microeconomics is the study of
choices that individuals and
businesses make, the way those
choices interact in markets, and
the influence of governments.
Study of small individual
economic units.
Example: households, firms and
industries making choices.
Macroeconomics
Macroeconomics is the study of
the performance of the national
and global economies.
Studies the aggregate behavior of
the entire economy
Example: unemployment,
inflation, GDP, international trade,
etc
 Two Big Economic Problems
Two big questions summarize the scope of economics:

• How do choices end up determining what, how, and for

whom goods and services get produced?

• Do choices made in the pursuit of self-interest also

promote the social interest?
 Two Big Economic Problems
 Land (rent)
1. What, How, and for Whom?  The “gifts of nature” that we use to produce
goods and services.
• Called as factors of production
 Labor (wages)
• Used in the production of goods and services
 The work time and work effort that people
• Classified as land, labor, capital, and enterprise
devote to producing goods and services.
• Scarce relative to the unlimited wants
 The quality of labor depends on human capital,
which is the knowledge and skill that people
obtain from education, on-the-job training, and
work experience.
 Capital (interest)
 The tools, instruments, machines, buildings, and
other constructions that businesses use to
produce goods and services
 Entrepreneurship (profit)
 The human resource that organizes land, labor,
and capital.
 Basic Economic Concepts

Scarcity Choice Opportunity Costs

economic resources are limited because of scarcity, we cannot the second best alternative
compared
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wants and must choose forgone after making a choice.
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unlimited from the available alternatives.
 Basic Economic Concepts
1. Scarcity
 economic resources are limited
compared to wants which are
unlimited
 scarcity – impossible to satisfy our
unlimited
 wants with the limited resources
 wants always exceed the limited
resources
 Peoples’ wants are greater than the
economy’s ability to produce desirable
goods & services
 arises because human wants for goods &
services are infinite but the resources
required to produce them are finite.
 a relative concept – resources are not scarce
in themselves, they are scarce in relation to
the demands placed upon them
 a universal problem as it applies to all
economies
 no country in the world has enough
resources to produce enough goods &
services to completely satisfy all the wants of
its people.
 always exists and cannot be eliminated, it
can be only reduced.
 Basic Economic Concepts
2. Choices

• because of scarcity, we cannot fulfill all wants and must choose from the available
alternatives.
• Choice is necessary because resources can be used in lots of ways to make different
goods & services.
• The only way unlimited wants can be reconciled with limited resources is through
choice
• As there are insufficient resources to satisfy all wants, choices must be made at all
levels i.e. individual consumers, producers, and the government.
• As scarcity is universal, everyone must choose.

SCARCITY  CHOICES
 Basic Economic Concepts
3. Opportunity Costs
• the second best alternative forgone after
making a choice.
• the second best foregone alternative.
• Example:
• Government has a piece of vacant land to be
used either to build a hospital, a school, or a
sports center (scarcity).
• Because the land is enough for only one
project, then choice must be made from the
alternatives available (choice).
• The government decides to build a hospital,
so the school must be forgone/sacrificed
(opportunity cost)
• Every choice involves a sacrifice or trade-
off
• Choosing more of one thing means
giving up something else in exchange
• It is a direct result of scarcity and occurs
every time choice is made
• This is a real cost, the cost of an item not
in terms of money, but in terms of the
resource, good or service that had to be
given up to obtain that item
Basic Economic
Concepts
Basic Economic
Concepts
 MY SCALE OF PREFERENCES

LIST OF NEEDS (3 – 5) SCARCITY CHOICE(S) OPPORTUNITY COSTS

(LIMITED RESOURCES)

List your needs or wants Elaborate what is your Pick your choice!! Things you need to give up
(state the price) limited resources

Explain why you choose

the need(s)?
 Economic Systems

Planned Economic Free Market Economic

Mixed Economic
System System
System
(Command/ Socialism) (Capitalism)

An economic system is a means by which societies or governments organize and distribute

available resources, services, and goods across a geographic region or country. Economic
systems regulate the factors of production, including land, capital, labor, and physical resources.
 Planned Economic System
(Command/ Socialism)
• In a centrally planned economy, major economic decisions are made by a central authority such as the
government.
• Centrally planned economies are different from market economies where large numbers of individual
consumers and profit-seeking private firms operate most or all of the economy.
• Central planning allows the government to marshal society's resources for goals that might not be achieved
by market forces alone.
• Other countries might resort to central planning in times of war or national emergency.

• Command economies are a feature of Communist nations. Nations that have this type of economy
include:

o Belarus
o Cuba
o Iran
o Libya
o North Korea
o Russia
 Planned
Economic System
(Command/
Socialism)
 Free Market Economic System
(Capitalism)
• In a purely free market economy, on the other hand, the law of supply and demand, rather than a central
planner, regulates production and labor. Companies sell goods and services at the highest price consumers
are willing to pay while workers earn the highest wages companies are willing to pay for their services.

• A capitalist economy is a type of free market economy; the profit motive drives all commerce and forces
businesses to operate as efficiently as possible to avoid losing market share to competitors. In capitalism,
businesses are owned by private individuals, and these business owners (i.e., the capitalists) hire workers in
return for wages or salary. In such an economy, the government serves no role in regulating or supporting
markets or firms.

• Most countries' economies contain elements of both free market and command economies.
• Singapore's economy is considered the freest, followed by Switzerland and Ireland, according to the
Heritage Foundation's 2022 Index of Economic Freedom.
• The United States ranks just 25th on the list.
• Venezuela and North Korea ranked last in terms of economic freedom in 2022.
Free Market Economic System
(Capitalism)
Free Market Economic System
(Capitalism)
 Mixed Economic System
• A mixed economy typically combines the features of a market-based economy with a strong
public sector. While most prices are set by supply and demand, the government may intervene
in the economy by enforcing price floors or ceilings for certain goods, or by directing public
funds to certain industries at the expense of others.
• The following are common examples of mixed-economy policies:
• Social Welfare Programs - Most mixed economies, even heavily market-oriented ones, offer
benefits to those living at or near the poverty level.
• Price Controls / Subsidies - While prices in a mixed economy are generally set by the
market, the government may intervene to prevent the prices of certain commodities from
rising or falling below a certain level. For example, most mixed economies have minimum
wage laws to prevent exploitation of the workforce, and they may use subsidies to support
farmers or other key industries.
• Strong Business Regulations - While most business activity is guided by the free market,
governments may use regulations to protect the public from dangerous products, pollution,
or monopolistic business practices.
Mixed Economic System