Introduction

to Economics
CHAPTER 1
What is Economics?

 The study of how individuals and societies

choose to allocate and use limited
resources to satisfy unlimited wants.

 Embedded in the definition are four key

words:
 Choice
 Resource Allocation
 Scarcity
 Unlimited Wants
 What is Economics?

Economics involves

 Examining how individuals, businesses,

governments, and societies choose to use scarce
resources to satisfy their wants.
 Organizing, analyzing, and interpreting data about
those economic behaviors.
 Developing theories and economic laws that
explain how the economy works and to predict
what might happen in the future.
 Why Study Economics?

A good understanding of this subject will not only help us learn

economics as an academic discipline but would also help us
understand the world and the reality that we are in. Specifically, a
study of this course will help us:
1. Appreciate events in economic history and understand
how the present-day system of economics came to be.
2. Learn the ways in which economics explain the activities
of man through its tools, models, principles and
standards.
3. Make use of production and consumption concepts in
business activities or simply in understanding people’s
economic behavior.
 Why Study Economics?

4. Manage economic and financial affairs; thereby,

achieving a good standard of living for ourselves, our
families and our nation.
5. Understand government’s functions in economics and
choose leaders who are economically sensible.
6. Understand what is happening in the economy of the
world and know how nationwide and worldwide
economic policies and events affect us all.
 Two Branches of Economics

Microeconomics
 A branch of economics which is concerned
with the behavior of. individual entities such as
markets, firms, and households

Macroeconomics
 A branch of economics which is concerned
with the overall behavior and performance of
the economy as whole.
Scope of Microeconomics

Microeconomics studies
 Buying decisions of the individual
 Consumers’ satisfaction
 Buying and selling decisions of the firm
 The determination of prices and markets
 The quantity, quality and variety of
products
 Profits
 Scope of Microeconomics
Macroeconomics studies

 Economic growth
 Unemployment and inflation
 Aggregate demand and aggregate
supply
 Economic policies – fiscal and monetary
 International trade – exports and
imports
 Money supply
 Let’s Check Your Understanding!

Which of the following questions involve microeconomics, and which

involve macroeconomics? In each case, explain your answer.

1. Why did consumers switch to using Smart TVs in

2013?
2. Why did overall consumer spending slow down in
2013?
3. Why did the standard of living rise more rapidly in
the current administration compared to previous
administration?
4. Why have starting salaries for students with geology
degrees risen sharply of late?
5. What determines the choice between rail and road
transportation?
6. Why did the computers get cheaper over the past
5 years?
Concept of
Scarcity
 Scarcity exists because individuals want more than can be
produced. It implies that there are not enough resources to satisfy
human wants.

 The condition in which our wants are greater than the resources
available to satisfy them.

 Scarcity means making choices. Wants are unlimited and resources

are limited. Therefore, scarcity exists, and people must make
choices.
 Wants versus Needs

Wants are desires that can be satisfied by

consuming a good or service.

Needs are things, such as food, clothing,

and shelter, that are necessary for survival.

Necessities are few but our wants are

endless.
 Let’s Check Your Understanding

Determine whether each of the following is a want or

a need.
1.Fruits and Vegetables

2.Education

3.Medicine

4.Luxurious car

5.Jewelry
 Goods versus Services
Good is something that is intended to satisfy some wants or
needs of a consumer and thus has economic utility. It is
normally used to denote tangible commodities such as
products and materials that can be purchased and
consumed.

Goods can be categorized as:

 Economic Good and Free Good

 Durable Good and Nondurable Good
 Intermediate Good and Final Good
 Consumer Good and Capital Goods

.
 Goods versus Services

Service is an intangible commodity. More

specifically, services are an intangible
equivalent of economic goods. These are
tasks that you pay other people to perform for
you.
Services are work that one person performs for
another for payment.
Services include:
•the work of sales clerks,
•technical support representatives,
•teachers,
•nurses,
 Let’s Check Your
Understanding!
Determine whether each of the following is a good or a
service.

1. Beauty shop or barbershop.

2. Furniture
3. Pineapples
4. Legal counsel
5. Books
 Opportunity Cost

 This is a key concept in economics, and has been

described as expressing "the basic relationship
between scarcity and choice“.

 It is the cost of any activity measured in terms of

the value of the best alternative that is not chosen
(that is foregone).

 It is the sacrifice related to the second best choice

available to someone, or group, who has picked
among several mutually exclusive choices.
Opportunity Costs

Opportunity Cost Examples

What you
What to Do have Done Opportunity Cost
Watch a The opportunity cost of watching
television Read a book television is reading a book.
Going to The opportunity cost of going to
college Having a job college is having a job
The opportunity cost of buying good A
Buy good A Buy good B is buying good B.
Produce The opportunity cost of producing
Produce tablet laptop tablet is producing laptop
Spend on The opportunity cost of spending
Spend on national infrastracture is spending on national
infrastructure defense defense
Cost-Benefit Analysis

•Individuals do make their choices randomly.

Rather, they carefully looked at the benefits they
would gain and the opportunity costs they would
incur from their decisions. This practice of
examining the costs and the expected benefits
of a choice as an aid to decision making is called
cost-benefit analysis.
•It is an approach that weighs the benefits of an
action against its costs. Cost-benefit analysis is
one of the most useful tools for individuals,
businesses, and governments when they need to
evaluate the relative worth of economic choices.
Economic
Activities
1.Production. The process of transforming inputs into
outputs.
2.Distribution. The way total output, income, or
wealth is distributed among individuals or among
the factors of production
3.Exchange. The process of trading goods between
buyers and sellers in a particular market.
4.Consumption. The process of how goods and
services are utilized that give satisfaction to the
consumers.
Economic Resources

 Economic Resources (also called factors

of production or productive inputs) are
what people use to produce goods and
services. These are inputs used by the firm
to produce a good or service. These
inputs include the following:
Categories of Economic
Resources
 Land includes all natural resources, such as minerals,
timber, and water, as well as the land itself.

 Labor refers to the physical and intellectual services

of people and includes the training, education, and
abilities of the individuals in a society.

 Capital refers to products such as machinery and

buildings that are used to produce other goods and
services

 Entrepreneurship is a human resource that combines

these factors of production creatively and
efficiently.
Functions of an Entrepreneur

 The entrepreneur takes the initiative in

combining the resources of land, labor, and
capital to produce a good or a service.

 The entrepreneur makes the strategic

business decisions that set the course of an
enterprise.

 The entrepreneur is an innovator.

 The entrepreneur is a risk bearer.

Let’s Check Your
Understanding!
 Determine what category of economic
resources each of these belongs.

1. Factory worker

2. Company’s CEO

3. Assembly plant

4. Industrial robots

5. Mineral deposits
 Economic Goals

1. Economic efficiency

2. Economic growth and economic development

3. Economic freedom

4. Economic security

5. Equitable distribution of income

6. Full employment

7. Price level stability

8. Reasonable balance of trade

Three Economic Questions

 Economic System is the way in which a

society decides what goods to produce, how
to produce them, and for whom goods will be
produced. Whether rich or poor, every nation
must answer the same three fundamental
economic questions:

1. What to produce?
2. How to produce?
3. For whom to produce?
What to Produce?

 To answer the first fundamental economic question,

a society must decide the mix of goods and services
it will produce. Will it produce mainly food, or will it
also produce automobiles, televisions, computers,
furniture, and shoes? The goods and services a
society chooses to produce depend, in part, on the
natural resources it possesses.

 Because of scarcity, no country can produce every

good it wants in the quantity it would like. More of
one good (say, television sets) leaves fewer resources
to produce other goods (such as cars). No matter
what nation we are talking about—the United States,
China, Japan, India, Russia, Cuba, or Brazil—each
must decide what goods will be produced.
How to Produce?

 The next question every society has to answer deals

with the ways in which people produce the goods.
Will farmers using modern tractors produce food, or
will farmers using primitive tools produce it? Will the
food be produced on private farms, where
production decisions are made by individual
farmers, or will it be produced on collective farms,
where production decisions are made by people in
the government?

 Answering this second question involves using scarce

resources in the most efficient way to satisfy society’s
wants. Again, decisions on methods of production
are influenced, in part, by the natural resources
society possesses.
For Whom to Produce?

 This answers how goods and services are distributed

among people in society. This actually involves two
questions.
 Exactly how much should people get and how should their share
be delivered to them?
 Should everyone be determined by how much he or she is willing
to pay? get an equal share of the goods and services? Or should a
person’s share
 Once the question of how much has been decided,
societies must then decide exactly how they are
going to get these goods to people. To do this,
societies develop distribution systems, which include
road and rail systems, seaports, airports, trains, ships,
airplanes, computer networks—anything that helps
move goods and services from producers to
consumers in an efficient manner.