Richie Angeles

Introduction to Economics
 Inquiry Method
• A system used which focused on using and
learning content
• Emphasis on how we came to know
• Teacher as facilitator of learning
• Students are involved in the construction of
knowledge through active involvement
 5 characteristics
• Bloom Taxonomy
• Ask that motivate
• Utilize wide variety of resources
• Teacher as guide
• Meaningful products come out of inquiry
 Economists study…
• How people make decisions
• How people interact with each other
• The forces and trends that affect the
economy as a whole.
 The Central Economic Problem
• The scarcity of resources
• Multiplicity of wants
• The problem of choice
• The fundamental economic problem is to
use our limited resources to produce the
items that we value most highly.
 Scarcity
• It is the imbalance between our desires and
available resources.
 Needs and Wants
• Needs-the necessities of life
• Ex.Food & drink,clothing and housing
• Wants-the luxuries
• Ex. Cars, videos, music systems, CDs,
Gsms, books, magazines, TVs, etc.
 Factors of Production
• Land
• Labor
• Capital
• Entrepreneurship
 3 Basic Questions
• 1. What to produce?
• 2. How to produce?
• 3. For whom to produce?
 Production Possibility Frontier
Possibiity Guns Butter
a 0 and 15
b 1 and 14

c 2 and 12

d 3 and 9

e 4 and 0
 PPF
• Y

g
15 a b
butter c
h d
e
guns X
 Attainable and unattainable
combinations
• The line AE is the PPF
• A & E are two extreme possibilities where all resources are
used for the production of either guns or butter
• Points a,b,c,d,&e, on the PPF show various combinations
of guns and butter w/c are attainable
• It separates the attainable from the unattainable
• Combination G above the PPF is unattainable since it is
beyond the resources of the society
• Combination H is in the PPF is attainable but not efficient
 Production efficiency
• We achieve production efficiency when we
cannot produce more of one good without
producing less of some other good
• When production is efficient, we are at a
point on the PPF
• If we are at a point inside the PPF, such as
point H, production is inefficient because
we have some resources unused or
misallocated
 Trade off
• On the production possibility frontier, every
choice involves a trade off- we must give up
something to get something else.
• We should give up some butter to get more
guns.
• All trade off involve a cost- an opportunity
cost.
 Opportunity Cost
• The opportunity cost of an action is the highest valued
alternative forgone.
• All activities that have a next best alternative have an
opportunity cost.
• Given our current resources and technology, we can
produce more guns and only if we sacrifice or forgo some
butter
• So the opportunity cost of producing an additional gun is
the number of bottles of Pepsi we must forgo.
 Economic Growth
• Economic growth means an increase in the total output of an economy.
It occurs when a society acquires new resources or when it learns to
produce more using existing resources. It is shown by a shift in the
PPF up to the right.
Butter

A1

x
F F1 Guns
 How people make decisions
• People face tradeoffs
• The cost of something is what you give up
to get it
• People respond to incentives
 How people interact
• Trade can make everyone better off
• Markets are usually a good way to organize
economic activity
• Governments can sometimes improve
economic outcomes
 1. People face tradeoffs
To get one thing, we usually have to give up another
thing.
• War v. peace
• Food v. clothing
• Leisure time. Work
• Efficiency v. quality

Making decisions requires trading off one goal

against another.
 People respond to benefits
• Changes in costs or benefits motivate
people to respond
2. The cost of something is what
you give up to get it
Decisions require comparing costs and
benefits of alternatives.
• Whether to go to college or to work
• Whether to study or go out on a date
• Whether to go to class or sleep in
 3. People respond to incentives
• Changes in costs or benefits motivate
people to respond
• The decision to choose one alternative over
another occurs when that alternative
benefits exceed it costs!
People respond to incentives

LA Laker basketball star Kobe

Bryant chose to skip college and go
straight to the NBA from high school
when offered a $10 million contract.
 Trade can make everyone better
off
• People gain from their ability to trade with
one another
• Competition results in gains from trading
• Trade allows people to specialize in what
they do best.
 Markets are usually a good way
to organize economic activity
• In a market economy, households decide
what to buy and who to work for
• Firms decide who to hire and what to
produce.
 Markets are usually a good way
to organize economic activity
• Because households and firms look at prices
when deciding what to buy and sell
• As a result, prices guide decision makers to
reach outcomes that tend to maximize the
welfare of society as a whole
 Governments can sometimes
improve market outcomes
• When the market fails (breaks down)
government can intervene to promote
efficiency and equity
 Market failure

Occurs when the market fails to

allocate resources efficiently
 Market failure
• May be caused by an externality, which is
the impact of one person or firm’s actions
on the well-being of a bystander.
 Market failure
• May also be caused by market power,
which is the ability of a single person or
firm to unduly influence market prices.
 Summary
• When individuals make decisions they face
tradeoffs.
• Rational people make decisions by
comparing costs and benefits
• People can benefit by trading with each
other
 Summary
• Markets are usually a good way of
coordinating trades
• Government can potentially improve market
outcomes.