Introduction To Economics

What is Economics?
• The Study of how individuals and societies
make decisions about ways to use scarce
resources to fulfill wants and needs.
• Scarce resources are used to make goods and
services.
 Needs and Wants
• Needs: “Stuff” we must have to survive, Food,
Shelter, Clothing
• Wants: “Stuff” We should really like to have
(Luxuries)
 A Budget Line
• A budget line is a straight line that slopes downwards
and consists of all the possible combinations of the
two goods which a consumer can buy at a given
market price by allocating all his/her income.
• To understand how households make decisions,
economists look at what consumers can afford. To do
this, we must chart the consumer’s budget constraint.
In a budget constraint, the quantity of one good is
measured on the horizontal axis and the quantity of
the other good is measured on the vertical axis. The
budget constraint shows the various combinations of
the two goods that the consumer can afford.
 A consumer’s budget line
• The Budget Line: Whole-Unit Combinations of DVDs
and Paperback Books Attainable with an Income of
$120 Units of DVDs Units of Books
• DVD(Price=$20) (Price=$10) Total Expenditure
• 6 0 ($120=$120+$0)
• 5 2 ($120=$100 +$20)
• 4 4 ($120=$80 +$40)
• 3 6 ($120=$60 +$60)
• 2 8 ($120=$40 +$80)
• 1 10 ($120=$20 +$100)
• 0 12 ($120=$0 +$120)
 Trade offs
• You can’t have it all (Scarcity – remember) So
you have to choose how to spend your money,
time and energy.
• These decisions involve picking one thing over
all the other possibilities – a Trade off.
Opportunity Cost: The Cost of Choice
• The real cost of choosing one thing and not
another is known as the opportunity cost.
• DVD(Price=$20) (Price=$10) Opportunity Cost
• 6 0 -
• 5 2 1
• 4 4 1
• 3 6 1
• 2 8 1
• 1 10 1
• 0 12 1
 Production
• Goods and Services are produced in
order to satisfy people’s wants.
• Firms or businesses are producers.
• The firm uses the resources to make
goods and services.
 Factors of Production
• The scarce resources available for use in the production
of goods and services to satisfy wants are called factors
of production. These are the inputs into a production
process from which an output of goods and services
emerges.
• Land (Natural Capital): Land resources include all the
“gifts of nature”.
• Forests, Oil, Soil, minerals
• Labor (Human Capital): Labor resources are those
provided by the body and minds of man.
• Doctors, Teachers, Construction workers
 Factors of Production
• Capital (Physical Capital):
• Man-made resources which help to produce
many other goods and services are known as
capital.
• Capital is the machinery or tools that workers
use to transform natural resources into
finished goods.
• The things we use to make things.
 Factors of Production
• Entrepreneurship: Investment
• Investing time, natural resources, labour and
capital are all risks associated with production.
• The people who have ability to run a
production process and can control and
manage firms are called entrepeneurs.
 Three parts to the Production Process
• Factors of Production: What we need to make
goods and services.
• Producer: Company that makes goods and
delivers services. The people who make and
sell goods and services are known as the
producer.
• Consumer: The people who buy goods and
services to satisfy their wants are known as
consumers and their spending is called
consumption expenditure.
Production Process
Capital Goods and Consumer Goods
• Capital Goods: Man-made resources
which help to produce other goods and
services are known as capital goods.
• Capital goods are bought by producers.
• The buying of capital goods is known as
investment.
Capital Goods and Consumer Goods
• Consumer Goods: A consumer good is
any good that satisfies consumers’ wants.
• Final products that are purchased
directly by the consumer.