CHAPTER 1 GENERAL INTRODUCTION

1. Definition of Economics, macroeconomics, microeconomics

• Economics is the study of how society manages its scarce resources.
• Scarcity: the limited nature of society’s resources→produce all the goods and
services people wish to have.

Classification
- Microeconomics is the study of how households and firms make decisions and how
they interact in markets.

- Macroeconomics is the study of economy-wide phenomena, including inflation,

unemployment, and economic growth.

2. Subject and research methods of Microeconomics

2.1. Subject
Microeconomics is the study of how households and firms make decisions and how
they interact in markets.

2.2. Research methods

- Ceteris paribus assumption: All other things being equal.
- Economic model: An explanation of how the economy or part of the economy
works.
3. Fundamental economic issues

What is to be produced?
Enterprises must determine the goods and services that they will produce or provide
by doing market research and making specific plans.

How are the goods to be produced?

How can resources be used efficiently?

For whom?
For whom are the goods to be produced?

4. Optimal economic choice

4.1. Choice’s principles

- Need to choose because of scarce resources. If resource is already spent on A, it can
not be spent on B → People face trade-offs:
=> Make decisions: Compare cost with benefits of alternatives

4.2. Choice’s target

- Household: Optimize utility
- Firm: Optimize profit
- Government: Optimize social welfare
4.3. Choosing tool

Opportunity cost (OC): the value of the best missed chance when making a choice

Marginal thinking
• Marginal cost (MC): the chance in total cost resulting from a change from quantity
• Marginal benefit (MB): the change in total benefit resulting from a change from
quantity

=> Only choose to do something if the benefits larger or equal to the costs

*Production Possibilities Frontier - PPF

PPF is a graph that shows the combinations of output that the economy can possibly
produce given the available factors of production and the available production
technology.

Assumptions:
- An economy produces only two goods;
- All of the economy’s factors of production are used.
 KEY TAKEAWAY

Economic resources are scarce. Faced with this scarcity, we must choose how to
allocate our resources. Economics is the study of how societies choose to do that.
Microeconomics focuses on how individuals, households, and firms make those
decisions.

Key terms

➢Scarcity: The fact that there is a limited amount of resources to satisfy unlimited wants

➢Economic resources: Things that are inputs to production of goods and services. There
are four economic resources: land, labor, capital, and technology. Technology is
sometimes referred to as entrepreneurship.

➢Land: Natural resources that are used in the production of goods and services. Some
examples of land are lumber, raw materials, fish, soil, minerals, and energy resources.

➢Labor: Work effort used in the production of goods and services. Some examples are the
number of workers and number of hours worked.

➢Capital: Physical goods that are produced and used to produce other goods. Examples of
capital would be machinery, technology, and tools such as computers; hammers;
factories; robots; trucks, and trains used to transport goods; and other equipment
employed in the production of a good or service.

➢Technology (sometimes called entrepreneurship): The ability to combine the other

productive resources into goods and services.

➢ceteris paribus: A Latin phrase essentially meaning "all else equal", which is used in
economics to emphasize the idea that the only changes you should be thinking about are
the ones that are explicitly described; for example, if we are talking about how someone
reacts to a change in the price of a good, you should assume the only thing changing is
price and not preferences, income, or anything else.

➢normative statements: statements that describe opinions or how things ought to be.

➢positive statements: statements of fact or description of how something actually is.

 Key Takeaways

Scarcity and Choice

Scarcity is why economics exists: we wouldn't have to worry about how scarce
resources are allocated if those resources were unlimited. It should be emphasized that
economics is primarily concerned with the scarcity of resources.

Positive vs. normative analysis

Economic analysis tends to focus mostly on positive analysis, that is, the description
of phenomena, facts, and concepts. It can be tempting to analyze things using
normative analysis, that is, describing things as they ought to be.
However, you shouldn't interpret that to mean that normative thinking is completely
absent in economics and especially in policy-making: both are important for
well-formed policy.

Economic models
A model is a simplification of a concept or process that is used to better understand
that process by cutting away as much as possible to focus on key aspects. For
example, a map is a model of how roads are laid out and where they intersect. Maybe
there is other useful or interesting information, like the location of an interesting mural
or the world's best taco stand, but if we are just interested in getting to the store, we
don't need that, we just need to know how to get there.
Economists rely on models because it's impossible to capture the full complexity of
human interaction, let alone try to do it in a straightforward and easy to read way!

Common errors
Not all costs are monetary costs. Opportunity costs are usually expressed in terms of
how much of another good, service, or activity must be given up in order to pursue or
produce another activity or good.

You might hear the fourth economic resource referred to as either entrepreneurship or
technology. The terms are used interchangeably but mean the same thing: the ability
to make things happen. Take the example of computers—a computer itself would be
considered a good, but our ability to make computers would be considered technology.

The word capital is used in everyday language to mean what economists would call
financial capital. If you see the word capital on its own in an economics context, it
refers to physical capital—equipment, machinery, or tools used to produce goods and
services. Physical capital is tangible, but financial capital isn't always so.
*A good is nonrival if its consumption doesn’t interfere with another agent’s ability to
also consume it.
=> Information is not used up when it is consumed, so when someone uses
information it doesn’t prevent someone else from using the same information. For
example, when you watch a video on Khan Academy for your Microeconomics exam,
it doesn’t stop any of your friends from watching the same video at the same time.