Economics is the study of how individuals,

businesses, and societies allocate resources to

satisfy their needs and wants. It encompasses a
range of fundamental concepts that help us
understand how economic systems function and
how individuals make choices.

Hasibul Hasan nayem

69th Batch

Chapter 1: Nature, Scope, and Basic

Concepts of Economics
Course: Microeconomics -1 (ECO-111)
Course Teacher : ARS
A Note By : Hasibul Hasan Nayem

( 2111042116 ; 69th Batch )

Department of Economics

Chapter 1: Nature, Scope, and Basic Concepts of

Economics

Question 1: What are the Ten Principles of Economics?

Answer: According to Gregory Mankiw’s “Principles of Economics,” there are ten principles of
economics that can be summarized as follows:

1. People face trade offs

2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.
8. A country’s standard of living depends on its ability to produce goods and services.
9. Prices rise when the government prints too much money
10. Society faces short-run tradeoff between inflation and unemployment.

Question 2: Define the concept of scarcity in economics. What is the relationship between scarcity
and choice? [2020]

Or, Economics is all about scarcity – how would you explain this statement? [2019]
Answer: Scarcity is the limitations; insufficient resources, goods, or abilities to achieve economic wants
or the desired ends. It is a term describing finite resources, or the perception of limited resources,
when there is not enough to fulfill human needs and wants. It can also refer to how companies decide
what and how to produce using the limited resources and how they determine a retail price for the
item based on purchase demand.
Economics is the study of scarcity and its implications for the use of resources, production of goods and
services, growth of production and welfare over time, and a great variety of other complex issues of
vital concern to society.

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Question 3: Who are the decision making agents in an economy? [2020] [2017]
Answer: Within an economy, there are mainly four decision making agents. They are:

1. Individuals: Individuals are the basic units of a society. The individual here will be understood
as making decisions for his or her family or household. They provide labor to firms and purchase
goods and services.
2. Business firms: Business firms are artificial units. Every firm is ultimately owned by or operated
for the benefit of one or more individuals. They employ factors of production – labor and
capital. Labor are the people working in a company. Capital is machines and factories that are
also part of the production process.
3. Governments: Governments are also economic decisionmakers. Governments set the legal
framework within which the entire economy works. Unlike firms and individuals, governments
have the legal right to take property without consent (as by taxation).
4. Other agents:
i. Trade unions and cartels (organization of sellers)
ii. Voluntary associations such as clubs, foundations, and religious institutions (through
which individuals combine for collective consumption choices)

Question 4: What is the production possibility curve? Draw a concave production possibility curve
and show & explain the efficient and inefficient points. What is an increasing opportunity cost?
[2020]

Explain the concepts of scarcity, choice, efficiency and opportunity cost with the help of PPC. [2017]
What does a production possibility frontier (PPF) depict? Explain the concepts of ‘trade off’ and
‘opportunity cost’ with the help of the PPF. [2019]

Answer: The production possibility frontier (PPF) is a curve on a graph that illustrates the possible
maximum quantities that can be produced of two products if both depend upon the same finite
resource for their manufacture. The PPF is also referred to as the production possibility curve.
The PPF is the area on a graph representing production levels that cannot be obtained given the
available resources; the curve represents optimal levels. Here are the assumptions involved:

i. A company/economy wants to produce two products

ii. There are limited resources
iii. Technology and techniques remain constant
iv. All resources are fully and efficiently used

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Efficient point: Efficient point is any combination of goods for which currently available resources do
not allow an increase in the production of one good without a reduction in the production of the other.

Inefficient point: Inefficient point is any combination of goods for which currently available resources
enable an increase in the production of one good without a reduction in the production of the other.

Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC
are unattainable.

The PPF curved line illustrates the law of increasing opportunity cost. The law of increasing opportunity
costs states that as one good is produced, the opportunity cost to produce another good will increase.

How the PPC reflects Efficiency and Inefficiency: The Production Possibilities Curve (PPC) captures
scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or
services. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points
beyond the PPC are unattainable.

How the PPC reflects Scarcity: Scarcity is revealed by the fact that any movement along the PPC (like
moving from point A to D), So if the production of good-x (pineapples) is increased from then the
production of good-y (crabs) decreases which indicates that the resources are limited or scarce because
if production of one good increases then the production of the other decreases.

How the PPC reflects Choice: A change in the tastes and preferences of society will lead to a
movement along the PPC which reflects a change in choice. The tastes and preferences of society may
change due to technological advancements. For instance, the invention of the smartphone and tablet
computing has led to a change in the tastes and preferences of society towards electronic publications.
As such, the market may be more inclined to produce more electronic publications.

How the PPC reflects opportunity cost: The PPC is concave to the origin because the opportunity cost
of producing each good increases as its quantity increases. This is because resources are not equally

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suitable for the production of different goods. As the economy produces more and more of a good, it
has to use resources that are less and less suitable for producing the good to actually produce the
good. Therefore, increasingly more units of other goods have to be given up to produce each additional
unit of the good. For instance, a farmer has a plot of very arable land that can be used to grow
strawberries. To increase production of the strawberries, the farmer may have to utilize surrounding
plots of land which are less fertile. As a result, the yield of strawberries per acre of land would
decrease. Thus, the PPC is concave.

How the PPC reflects trade off: The Production Possibilities Curve (PPC) is a model used to show the
tradeoffs associated with allocating resources between the production of two goods.

Question 5: Describe the basic themes of economics. [2021] [2018]

Answer: Some basic economic themes are:

1. Scarcity: Scarcity is one of the key economic concepts. In economics, it refers to the limited
availability of resources for human consumption. The world population needs are unlimited,
whereas the resources to meet the needs are limited.
2. Supply and Demand: Another important economic concept is supply-demand. Supply refers to
the number of goods and services available for consumers. The law of supply states that as price
increases, also supply increases and vice versa. Hence the supply curve is upward sloping.
Demand indicates the number of goods and services consumers are willing and able to
purchase. According to the law of demand, as price increases, demand decreases and vice
versa. Therefore, it points to a downward sloping demand curve.
3. Incentives: Incentive refers to the factor that influences the consumer in the decision-making
process.
4. Trade-off and Opportunity Cost: A trade-off occurs when a decision leads to choosing one thing
over another. The loss incurred by not selecting the other option is called opportunity cost
when one option is selected. For example, a trade-off occurs when Mr. A takes a day off at
university to go to a cinema. The opportunity cost is what Mr. A loses by not attending
university for a day like participation point.
5. Economic Systems: An economic system comprises various entities forming a social structure
that enables a production system, allocation of resources, and exchange of products and
services within a community. Capitalism, communism, socialism, and market economy are types
of economic systems.
6. Factors of production: Another important economic concept is factors of production. It refers
to inputs applied to the production process to create output: the goods and services produced
in an economy. The essential factors of production forming the building blocks of an economy
include land, labor, capital, and entrepreneurship.
7. Production Possibilities: In economics, production possibility frontier is a curve in which each
point represents the combination of two goods that can be produced using the given finite
resources.
8. Marginal Analysis: The marginal analysis compares the additional cost incurred and the
corresponding additional benefit obtained from an activity. Usually, companies planning to

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 expand their business by adding another production line or increasing volumes perform this
analysis.
9. Circular Flow: The circular flow model in economics primarily portrays how money flows
through different units in an economy. It connects the sources and sinks of factors of
production, consumer & producer expenditures, and goods & services. For example, resources
move from household to firm, and goods and services flow from firms to households.
10. International Trade: International trade occurs when a trade happens between countries.
Goods and services are traded across countries contributing significantly to GDP. The two main
types of international trade are import and export. Import is the purchase of goods or services
from another country. In this form, payment has to be made to the other country. Thus, it
involves the outflow of money.

Question 6: What are the three economic questions that every society must answer? Briefly describe
the differences the way centrally planned market, market and mixed economies answer these
questions. Explain. [2021]

What are the basic economic problems of a society? How does the market mechanism solve these
problems? [2015]

Answer: Because of scarcity every society or economic system must answer these three (3) basic
questions:

i. What to produce?
ii. How to produce?
iii. For whom to produce?

The way in which a society answers the three fundamental economic questions is called an economic
system. More formally, an economics system is a process or mechanism for answering the three
fundamental questions. There are mainly three economic systems. They are:

i. Centrally planned economy/centralized economy/socialist/communist: A centrally

planned economy, also known as a command economy, is an economic system where a
government body makes economic decisions regarding the production and distribution of
goods.
ii. Market economy/ free-enterprise economy: A market economy is an economic system in
which economic decisions and the pricing of goods and services are guided by the
interactions of a country's individual citizens and businesses. in such economy government
does not control economic activity.
iii. Mixed economy: Mixed economy is an economy in which most economic decisions result
from the interaction of buyers and sellers in markets, but in which the government plays a
significant role in the allocation of resources.

There are two extremes of how these questions get answered. In command economies, decisions
about both allocation of resources and allocation of production and consumption are decided by the
government. In market economies, there is private ownership of resources—established though
property rights—and the factors of production and consumption are all coordinated through markets.

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In a market system, resources are allocated to their most productive use through prices that are
determined in markets. These prices act as a signal for buyers and sellers. Most economies are mixed
economies that lie between these two extremes.

In either system, a rational agent would allocate resources and production using marginal analysis. I n
command economies, this is more difficult to do because without markets, prices fail at being an
effective signal.

Question 7: What does the circular flow diagram show? Explain, with diagrams, how households and
firms interact through factor and product markets. [2019]

Answer: The circular flow model demonstrates how money moves from producers to households and
back again in an endless loop. In an economy, money moves from producers to workers as wages and
then back from workers to producers as workers spend money on products and services.

The economy can be thought of as two cycles moving in opposite directions. In one direction, we see
goods and services flowing from individuals to businesses and back again. This represents the idea that,
as laborers, we go to work to make things or provide services that people want.

In the opposite direction, we see money flowing from businesses to households and back again. This
represents the income we generate from the work we do, which we use to pay for the things we want.

In the product market, households are the buyers and firms are the sellers. The firms produce the
goods and services which are bought by households. [In the factor market, households are the sellers
and firms are the buyers. The households provide labor and land which are bought by firms.]

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Question 8: What are the [Distinguish between] economic resources and noneconomic resources?
[2018]
Answer: Economic Factors are the following:

i. Natural Resource
ii. Capital Formation
iii. Size of the Market
iv. Foreign Trade
v. Economic System

Non-economic Factors are the following:

i. Human Resources
ii. Technical Know-how
iii. Political Freedom
iv. Social Organization
v. Moral, ethical and social values

Question 9: Why is “what to produce” a problem in every economy? How does the price mechanism
solve this problem in the three different economic systems? [2018]
Answer: A country cannot produce all goods because it has limited resources. It has to make a choice
between different goods and services. Every economy has to decide what goods and services should be
produced.
2021 & 2015

Question 10: In a market system, who ultimately decides which goods and services will be produced?
[2016]

Answer: In a market system, the decisions about which goods and services will be produced are
primarily driven by consumer demand and the interaction of buyers and sellers in the marketplace.
These decisions are not centrally planned by the government or any single entity but are determined
through the forces of supply and demand in a decentralized manner. Consumers ultimately decide
which goods and services will be produced. They do so by expressing their preferences through the
choices they make when purchasing goods and services. When consumers demand more of a particular
good or service, producers are incentivized to increase its production to meet the demand. Conversely,
when consumers demand less of a good or service, producers may reduce its production or discontinue
it altogether. This dynamic interaction between consumers and producers in the marketplace
determines the allocation of resources and the types of goods and services that are produced.

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Question 11: What is opportunity cost? What is the difference between trade-off and opportunity
cost?
Answer: The opportunity cost of a decision or choice that one makes is the value of the highest valued
alternative that could have been chosen but was instead forgone.
In economics, a trade-off refers to the concept of giving up one thing to obtain another. It involves
making a decision between two or more alternatives, where choosing one option often means
sacrificing another. For example, if one decide to spend your money on a vacation, he is giving up the
opportunity to use that money for other purposes such as buying a new gadget or saving for the future.

On the other hand, opportunity cost is the value of the next best alternative that is forgone when
making a choice. It represents the benefits or opportunities that you miss out on by choosing one
option over another. For instance, if you choose to attend a concert, the opportunity cost would be the
value of the time and money you could have spent on other activities like going to a movie or dining
out.

The difference between tradeoffs and opportunity cost is that a trade-off is all the resources that are
lost when a consumer makes a choice. An opportunity cost is the most desirable opportunity given up
when a consumer makes a choice.
In an opportunity cost, one goes for a better alternative while in a trade-off; the belonging is sacrificed
completely in the selection process of what one wants.

In an opportunity cost, a choice of better alternative is made hence more beneficial. On the other
hand, despite the fact that in a trade-off one gets what was actually demanded, the cost of other things
one possesses is affected.

Question 12:

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Answer:

Question 13: What is Positive statements and Normative statements?

Answer: In the context of economics, positive statements are based on facts and can be tested to
determine their truthfulness. It is also called descriptive analysis. They describe what is or was and do
not involve value judgments. For example, “The unemployment rate is 5%.” This statement can be
verified by analyzing the data on unemployment.
On the other hand, normative statements express opinions or ethics and are subjective in nature. It is
called prescriptive analysis and policy economics. They describe what should be or ought to be. For
example, “The government should increase taxes on the rich to help the poor.” Normative statements
cannot be proven true or false because they are based on personal values and beliefs.

It’s important to note that positive and normative statements serve different purposes in economics.
Positive statements help us understand the world as it is, while normative statements help us evaluate
and make judgments about what we believe should be.

“When you hit the point of no return, that’s the moment it truly
becomes a journey. If you can still turn back, it’s not really a journey.

– Hinata Miyake (A Place Further than the Universe)

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