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 21
• 4 41
• 3 61
• 2 81
• 1 10 1
• 0 12 1