TM 303 : Industrial Management

Lecture 15
Basic Concepts in
Economics
 What is Economics?

 Economics is the science of scarcity.

 Economics is the study of Choices
 Since we are unable to have everything we desire, we must make
choices on how we will use our resources.
 In other word Economics is the science that deals with the allocation,
or use, of scarce resources for the purpose of fulfilling society’s
needs and wants

Lecture 1 Basic Concepts in Economics

Scarcity

 Definition

 Scarcity is the condition in which our wants are

greater than our limited resources.

 A situation in which the amount of something

actually available would not be sufficient to
satisfy the desire for it, if it were provided free of
charge.

Lecture 1 Basic Concepts in Economics

 Shortage

 When there isn’t enough stuff.

 Not enough of a product can be supplied or it won’t be supplied. At least not at
current prices.

 If prices go up, it may become profitable for somebody to provide the good or
service and that will eliminate the shortage.

Lecture 1 Basic Concepts in Economics

Resources

 used to produce goods / services to satisfy human wants

 limited in supply

 scarce: i.e. their quantities are insufficient to satisfy all human

wants

Lecture 1 Basic Concepts in Economics

Types of resources

 Natural resources: e.g. sunshine, rain, crude oil

 Human resources: labour service

 Man made resources: e.g. machines, equipments

Lecture 1 Basic Concepts in Economics

WEALTH.

All material things produced by labor for the satisfaction of human desires and
having exchange value.
 This means that wealth must have all of these characteristics:
 Wealth is material. Human qualities such as skill and mental acumen are not
material, hence cannot be classified as wealth.
 Wealth is produced by labor. Land possesses all the essentials of wealth but one
— it is not a product of labor, therefore it is not wealth.
 Wealth is capable of satisfying human desire. Money is not wealth; it is a
medium of exchange whereby wealth can be acquired. Nor are shares of stock,
bonds or other securities classifiable as wealth. They are but the evidences of
ownership. None of these satisfy desire directly; if they are destroyed, the sum
total of wealth is not decreased.
 Wealth has exchange value. (More on this in a moment.)

7
Microeconomics

 Micro
 Micro comes from Greek word mikros, meaning “small”
 Microeconomics
 Study of behavior of individual households, firms, and governments
 Choices they make
 Interaction in specific markets

 Focuses on individual parts of an

economy, rather than the whole

Lecture 1 Basic Concepts in Economics

Macroeconomics

 Macro
 Macro comes from Greek word, makros, meaning “large”
 Macroeconomics
 Study of the economy as a whole
 Focuses on big picture and ignores fine details

Lecture 1 Basic Concepts in Economics

Micro vs. Macro

MICRO economics
Study of small economic units such as
individuals, firms, and industries (competitive
markets, labor markets, personal decision
making, etc.)

MACRO economics
Study of the large economy as a whole or in its
basic subdivisions (National Economic Growth,
Government Spending, Inflation, Unemployment,
etc.)
Lecture 1 Basic Concepts in Economics
 How is Economics used?
• Economists use the scientific method to make
generalizations and abstractions to develop theories. This is
called theoretical economics.
• These theories are then applied to fix problems or meet
economic goals. This is called policy economics.

Positive vs. Normative

Positive Statements- Based on facts. Avoids value

judgments (what is).
Normative Statements- Includes value judgments (what
ought toLecture
be).1 Basic Concepts in Economics
Thinking at the Margin

# Times Benefit Cost

Watching Movie

1st $30 $10

2nd $15 $10
3rd $5 $10
Total $50 $30
Would you see the movie three times?
Notice that the total benefit is more than the total
cost but you would NOT watch the movie the 3rd
time.
Marginal Analysis
In economics the term marginal = additional

“Thinking on the margin”, or MARGINAL

ANALYSIS involves making decisions based on the
additional benefit vs. the additional cost.

For Example:
You have been shopping at the mall for a half hour, the additional
benefit of shopping for an additional half-hour might outweigh the
additional cost (the opportunity cost).
After three hours, the additional benefit from staying an additional
half-hour would likely be less than the additional cost.
Lecture 1 Basic Concepts in Economics
5 Key Economic Assumptions
1. Society’s wants are unlimited, but ALL resources are
limited (scarcity).
2. Due to scarcity, choices must be made. Every choice
has a cost (a trade-off).
3. Everyone’s goal is to make choices that maximize their
satisfaction. Everyone acts in their own “self-interest.”
4. Everyone acts rationally by comparing the marginal
costs and marginal benefits of every choice
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
Lecture 1 Basic Concepts in Economics
The Factors of Production

Lecture 1 Basic Concepts in Economics

Opportunity Cost

 The true cost of choosing one alternative

over the other.
 Trade offs – giving up one thing in order to obtain another.

 The one that you give up when the choice is

made.
 Give an example of a time when you had to make an economic choice.
What was the opportunity cost?

 “Opportunity cost is the opportunity lost”

 Per Unit Opportunity Cost Review

Per Unit Opportunity Cost = Opportunity Cost

Units Gained
Assume it costs you $50 to produce 5 t-shirts. What is your
PER UNIT cost for each shirt?
$10 per shirt

Now, take money our of the equation. Instead of producing

5 shirts you could have made 10 hats.

1. What is your PER UNIT OPPORTUNITY COST for

each shirt in terms of hats given up?
1 shirt costs 2 hats

2. What is your PER UNIT OPPORTUNITY COST for

each hat in terms of shirts given up?
1 hat costs a half of a shirt
17
Making Economic Decisions

Options Benefit Opportunity Cost

0 hours studying, F on Test None
3 hours sleeping
1 hours studying, C on Test 1 hour of sleep
2 hours sleeping
2 hours studying, B on Test 2 hours of sleep
1 hour sleeping

3 hours studying B+ on Test 3 hours of sleep

Lecture 1 Basic Concepts in Economics