The Central Concepts

of Economics

Economics
Department of Economics
Paul A. Samuelson & William D Nordhaus
Faculty of Economics and Bussiness
Airlangga University
Ch. 1

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WHAT IS ECONOMICS??

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 Economics is….

• The study of how societies use scarce

resources to produce valuable goods and
services and distribute them among
different individuals

WHAT IS THE KEY WORDS??

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 Scarcity and Efficiency
• Scarcity is one of which goods are
limited relatives to desires

• The most effective use of a society’s

resources in satisfying people’s wants
and need.

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People Face Tradeoffs.

“There is no such thing as a free lunch!”

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 WHY STUDY
ECONOMICS??

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Why Study Economics ?

So that we can be rich and get job?

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Why Study Economics ?

So that we can be rich and get job?

NO !!!

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 Why Study Economics ?

So that we can be rich and get job?

NO !!!

So we could understand why we are

poor and unemployed
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 Why economics born?
UNLIMITED
human desires

Vs.

LIMITED
quantities of goods & services that can be produced

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 Economic Efficiency
• An Economy produce the highest
combination of quantity and quality of
goods and services given its technology
and scarce resources

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 Economic Efficiency...

• An Economy produce that highest

combination of quantity and quality of
goods and services given its
technology and scarce resources
• The economy is producing efficiently
when it cannot increase the economic
welfare of anyone without making
someone else worse off
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 Facts of Life

Economic Goods > Free Goods

Efficiency SCARCITY ???

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 Facts of Life

Economic Goods > Free Goods

Efficiency SCARCITY Problem

of Choice

Trade-off

Opportunity
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 Definition of Economics...
• The study of how man and society choose,
to use scarce productive resource that
could have alternative uses, to produce
commodities in various kind and distribute
them among different groups.

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Microeconomics vs. Macroeconomics

• Microeconomics
– Concerned with behaviour of individual
entities such as markets, firms, and
households.
– Studied how individual prices is set
(commodities and factors of production)
– Adam Smith, The Wealth of Nation, 1776

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Microeconomics vs. Macroeconomics

• Macroeconomics
– Concerned with overall performance of
economy.
– Economic growth, Inflation, Unemployment,
etc.
– John Maynard Keynes, Theory of
Employment, Interest and Money, 1935.

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 The three problems of economic
organization

1. What ?

2. How ?

3. For whom ?

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 Answer...
• Depends on economic system that society
use to allocate its scarce resources...

• Two fundamentals systems (+1):

1. Market economy
2. Command economy
Mixed economy

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 Market Economy

• Individuals and private firms make the

decisions about production and
consumption.

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 Market Economy
• Individuals and private firms make the
decisions about production and
consumption.
1. Firms produce the goods that yield highest
profit (What?)
2. By the technique of production at least cost
(How?)
3. Consumption is determined by individuals
decisions about how they spend their
income (For whom?)
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 Market System
• The government keeps it hand off from
economic decisions  Laissez-faire
economy

• “Invisible hand” doctrine:

– In selfishly pursuing only his or her personal
good, every individual is led, as if by an
invisible hand, to achieve the best good for all

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“Invisible hand” doctrine

“it is not from the benevolence of the

butcher, the brewer, or the baker that we
expect our dinner, but from their regard to
their own self interest”

(Adam Smith, The Wealth of Nation, 1776)

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 Command Economy
• The government makes all important decisions
about production and distribution by ownership of
resources and its power to enforce decisions.

• Example: Soviet Union

• Goverment own most of means of production,

owns and direct the enterpises, employer of most
workers, decide how the output distribute among
society.
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 Inputs and Outputs
• Inputs are commodities or services that
are used to produce goods and services.
• Outputs are the various useful goods or
services that result from the production
process and are either consumed or
employed in further production

The categories of inputs are ??

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 THE PRODUCTION
POSSIBILITY FRONTIER (PPF)

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Production-Possibility Frontier (PPF)

show the maximum amounts of production

that can be obtained by an economy, given
its technological knowledge and quantity of
inputs available. The PPF represents the
menu of goods and services available to
society

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 PPF Asumptions

1. Limited resources

2. Certain level of technology

3. Economy on full-employment

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THE PRODUCTION –POSSIBILITY FRONTIER

Possibilities Butter Guns

( million of pounds ) (thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
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The Production Possibility Curve
GUN

A
15 B

C
12 I
D
9

6 E
U

3
F
BUTTER
0 1 2 3 4 5
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The Production Possibility Curve
GUN

A Inneficiency
15 B Scarcity

C
12 I
Trade-off
D
9 Opportunity Cost

6 E
U

3
F
BUTTER
0 1 2 3 4 5
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 Market Failures:
The Role of Government

• Innefficiency
– Monopoly
– Externalities
– Public goods
• Inequality
• Macroeconomic problem
– Business cycles (inflation & unemployment)
– Slow economic growth
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 Opportunity Cost
• In a world of scarcity, choosing one thing
means giving up something else
• The opportunity cost of a decisions is the
value of the good or service forgone

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MEMAHAMI GRAFIK

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 Dasar-Dasar Grafik

Y
Sumbu
vertikal

25

20

15 a

10

5 b
X
Sumbu
0 5 10
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Aini Hidayati 20 25 horisontal
 SLOPE
• Cara yang lebih teliti untuk menyatakan
bentuk dari suatu kurva adalah dengan
mengukur slope atau kemiringannya.
• Slope suatu garis merepresentasikan
perubahan satu variabel yang terjadi jika
variabel lain berubah.
• Slope suatu garis menunjukkan
perubahan pada variabel Y pada sumbu
vertikal per satu unit perubahan variabel X
pada sumbu horisontal.
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 Berbagai Jenis Slope Garis
Lurus
(a) Hubungan positif
(b) Hubungan negatif
(c) Tak berhubungan: Slope = o
(d) Tak berhubungan: Slope = tak terhingga
(infinite)

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