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TOPIC 1

THE FOUNDATIONS OF
ECONOMICS
What Economics Is All About

▪ Two fundamental facts provide a foundation for

economics
▪ Society’s economic wants and need:
▪ Economic resources:

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Wants and Needs

▪ Economic wants and needs refer to the desires of

consumers to obtain and use various goods and
services that provide pleasure or satisfaction.

▪ Overtime, wants and needs change and tend to

multiply, fueled by new products.

▪ All wants and needs are unlimited: our desires for

goods and services cannot be completely satisfied.

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Economic Resources - Factors of production

▪ Economic resources are classified into 4 categories

▪ Land:

▪ Capital:

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Economic Resources - Factors of production

▪ Labor:

▪ Entrepreneurial ability:

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▪ Scarcity: the limited nature of society’s resources
▪ Choice is defined as comparison of the different
elements to make decide whenever you purchase
goods and services.
▪ Opportunity cost is what you give up in order to
have something else.

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Scarce Resources study how
efficiently a society
Unlimited Wants
uses its scarce
resources to fulfill
the needs and
wants of its people

Economics 7
What Economics Is All About

▪ Economics: the study of how society manages its

scarce resources, e.g.
▪ how people decide what to buy,
how much to work, save, and spend
▪ how firms decide how much to produce,
how many workers to hire
▪ how society decides how to divide its resources
between national defense, consumer goods,
protecting the environment, and other needs
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Three Basic Economic Questions

▪ What to produce?
- What types of goods and services the society
chooses to produce?
▪ How to produce?
- What sort of technology can be used to produce
the goods and service?
▪ For whom to produce?
- How the goods and services are distributed
among people?
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Model: The Production Possibilities Frontiers

▪ The Production Possibilities Frontier (PPF):

a graph that shows the combinations of
two goods the economy can possibly produce given
the available resources and the available technology
▪ Example:
▪ Two goods: computers and wheat
▪ One resource: labor (measured in hours)
▪ Economy has 50,000 labor hours per month
available for production.

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 PPF Example
▪ Producing one computer requires hours labor.
▪ Producing one ton of wheat requires hours labor.

Employment of
Production
labor hours
Computers Wheat Computers Wheat
A 50,000 0
B
C
D
E
 PPF Example

Wheat
Point Production
(tons)
on Com- 6,000
graph puters Wheat
5,000
A
4,000
B
3,000
C
2,000
D
1,000
E
0
0 100 200 300 400 500 600
Computers
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 ACTIVE LEARNING 1
Points off the PPF
A. On the graph, find the point that represents
(100 computers, 3000 tons of wheat), label it F.
Would it be possible for the economy to produce
this combination of the two goods?
Why or why not?
B. Next, find the point that represents
(300 computers, 3500 tons of wheat), label it G.
Would it be possible for the economy to produce
this combination of the two goods?

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 ACTIVE LEARNING 1
Answers
Wheat
▪ Point F: (tons)
100 computers,
6,000
3000 tons wheat
5,000

4,000

3,000

2,000

1,000

0
0 100 200 300 400 500 600
Computers
 ACTIVE LEARNING 1
Answers
Wheat
▪ Point G: (tons)
300 computers, 6,000
3500 tons wheat
5,000
4,000
3,000
2,000
1,000
0
0 100 200 300 400 500 600
Computers
The PPF: What We Know So Far
Points on the PPF (like A – E)

Points under the PPF (like F)

Points above the PPF (like G)

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Microeconomics and Macroeconomics
▪ Microeconomics is the study of how households
and firms make decisions and how they interact in
markets.
▪ Macroeconomics is the study of economy-wide
view, including inflation, unemployment, and
economic growth.
▪ These two branches of economics are closely
intertwined, yet distinct—they address different
questions.

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NORMATIVE AND POSITIVE ECONOMICS

 As scientists, economists make

positive statements
 Positive economics describes the facts of the
economy.

 It studies objective or scientific explanations of

how the economy works.
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Answer for “What be”

NORMATIVE AND POSITIVE ECONOMICS

 As policy advisors, economists make

normative statements,
 Normative economics offers recommendations
based on personal value judgments.

Answer for “What should be”

Should, ought, bad, good…..

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Economic Systems

▪ An economic system is a particular set of

institutional arrangements and a coordinating
mechanism.

▪ Economic systems differ as to

▪ Who owns the factors of production
▪ The method used to coordinate and direct
economic activity
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Economic Systems

▪ Command Economy:

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Economic Systems

▪ Free market economy:

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Economic Systems

▪ Mixed Economy:

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Economic growth and Economic

development
• Economic growth is a concept describe an increase in
the level of real national income per capita between
one year and another in a economy.
• Economic development is a measure of welfare, a
measure of well-being. It is usual to measure
economic development not just in monetary terms
such as GDP but also in terms of other indicators,
such as education indicators, health indicators, social
indicators. one of the most commonly used
development measures, that is the human
Development Index (HDI).
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Sustainable development

• Sustainable development was the development

that meets the needs of the present without
compromising the ability of future generations to
meet their own needs.
SUMMARY

• As scientists, economists try to explain the world

using models with appropriate assumptions.
• Two simple models are the Circular-Flow Diagram
and the Production Possibilities Frontier.
• Microeconomics studies the behavior of consumers
and firms, and their interactions in markets.
Macroeconomics studies the economy as a whole.
• As policy advisers, economists offer advice on how
to improve the world.
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