INTRODUCTION TO

ECONOMICS
CHAPTER 2
• Learning Objectives
- Definition of Economics
- What Economics is all about
- Six Principles of Economics
- Origin and History of Economics
- 3 E’s in Economics
- Two Branches of Economics
- Scarcity
- Wants and Needs
- Trade-off
- Production
- Capital Goods and Consumer Goods
- What are Capital Goods
- Factors of Production
- Importance of Studying Economics
WHAT IS ECONOMICS?

Economics – the study of how individuals and

societies make decisions about ways to use
scarce resources to fulfill wants and needs.
WHAT ECONOMICS IS ALL ABOUT
• Scarcity- one of the key concepts of economics. It means that the demand for a
good or service is greater than the availability of the resources (shortage).
 Is a condition where there are insufficient resources to satisfy all the needs and
wants of a society.
• Economics: the study of how society manages its scarce resources. e.g.
- How people decide what to buy, how much to work, save and spend
- How firms decide how much to produce and how many workers to hire.
- How society decides how to divide its resources between consumer goods, protecting
the environment, and other needs.
SIX PRINCIPLES OF ECONOMICS
PRINCIPLE #1: PEOPLE FACE TRADEOFFS

All decisions involve tradeoffs. Examples:

• Going to a party the night before your midterm leaves less time for studying.
• Having more money to buy stuff requires working longer hours, which leaves less
time for leisure.
• Protecting the environment requires resources that could otherwise be used to produce
consumer goods.
• Making decisions requires trading one goal for another
Principle #2: The Cost of Something Is What You Give Up to Get It

• Making decisions requires comparing the costs and benefits of alternative choices.
• Opportunity cost is an economics term that refers to the value of what you have to give up
in order to choose something else.
• It is the relevant cost for decision making.
Example:
• The opportunity cost of…
A student spends three hours and $20 at the movies the night before an exam. The
opportunity cost is time spent studying and that money to spend on something else.
Principle #3: Rational People Think at the Margin
• A person is rational if she systematically and purposefully does the best she can to
achieve her objectives.
• When making decisions, rational consumers and businesspeople evaluate the costs and
benefits of changes.
Example:
• A student considers whether to go to college for an additional year, comparing the fees
& foregone earnings to the extra income he could earn with an extra year of education.
- Foregone earnings represent the difference between earnings actually achieved and the
earnings that could have been achieved with the absence of fees, expenses, or lost time.
Principle #4: Trade can Make Everyone Better Off

• Rather than being self-sufficient/independent, people can specialize in producing one good or
service and exchange it for other goods.
• Countries also benefit from trade & specialization:
- Get a better price abroad for goods they produce.
- Buy other goods more cheaply from abroad than could be produced at home.
Principle #5: Markets Are Usually A Good Way to Organize Economic Activity
• Market: is where buyers and sellers can meet to facilitate the exchange or transactions of goods
and services. Markets can be physical, like a retail outlet or virtual, like an e-retailer.
• “Organize economic activity” means determining
- what goods to produce
- how to produce them
- how much of each to produce
- who gets them
Principle #6: Prices rise when the government prints too much money

• Inflation: is the rate at which prices for goods and services rise.
• In the long run, inflation is almost always caused by excessive growth in the quantity of money, which
causes the value of money to fall.
• The faster the government creates money, the greater the inflation rate
• If the government prints too much money, people who sell things for money raise the prices for their
goods, services and labor. This lowers the purchasing power and value of the money being printed.
 Purchasing power is the amount of goods and services that a single unit of currency can buy. For
example, if you purchase a can of soda for one US dollar, but the following year a can of soda costs
two US dollars, the purchasing power of a single US dollar changed.
ORIGIN AND HISTORY
OF ECONOMICS
ORIGIN OF THE TERM “ECONOMICS”
“Greek word”
• Oikos – household
• Nomus – system or management

Oikonomia or Oikonomus – management of household or household management

* In its original sense the meaning of a strong economy is essentially one where a household is
well managed.
BRIEF HISTORY OF ECONOMICS
• 1700’s and 1800’s – Birth of Economic Theory
Adam Smith of Scotland
 Considered the most important personality (economist) in the
history of economics – “Father of Economics”
 Responsible for the recognition of economics as a separate body
of knowledge.
 Wealth of the Nations - published 1776 and known as “The
Adam Smith Bible in Economics”
1723 - 1790
David Ricardo
 Developed the basic analysis of the political economy or the
importance of a state’s role in its national economy.
 The term political economy is an older English term that
applies management to an entire polis (state).
Karl Marx
 His major work, Das Kapital (capital), is the centerpiece from
which major socialist thought has emerge.
• (1870s)
Leon Walras
 developed the analysis of equilibrium in several markets
 (quantity demanded and supplied are equal)
KEYNES’ GENERAL THEORY OF EMPLOYMENT,
INTEREST AND MONEY
• John Maynard Keynes

 English economist who offered an explanation of mass/

large unemployment and suggestions for government
policy to cure unemployment in his influential book: The
General Theory of Employment, Interest and Money.
3 E’S IN ECONOMICS
• Efficiency
 Refers to productivity and proper allocation of economic resources.

• Equity
 Means justice and fairness.

• Effectiveness
 Attainment of goals and objectives.
TWO BRANCHES OF ECONOMICS

Microeconomics
• Micro comes from Greek word mikros, meaning “small”.

• Micoeconomics is the branch of economics that considers the behavior of decision takers

within the economy, such as individuals, household and firms.

 Choices they make

 Interaction in specific markets

• Focuses on individual parts of an economy, rather than the whole.

Macroeconomics
• Macro comes from Greek word, makros,
meaning “large”
• Study of the economy as a whole

• Focuses on big picture and ignores fine details.

• Macroeconomic factors include economic

output, unemployment rates and inflation.
 BUT, THERE’S A
FUNDAMENTAL PROBLEM
SCARCITY:
• Refers to the limited availability of a resource in comparison to the limitless wants
(unlimited wants and needs but limited resources.)
• List five (5) of your favorite items (goods) (boots, phone,
etc.

• Where did you buy these items?

• Where were they made?

 CHOICES, CHOICES

• Because ALL resources, goods, and services are limited – WE MUST MAKE h
CHOICES!!!!
We make choices about how we spend our money, time, and energy so we can fulfill
our NEEDS and WANTS.

What are NEEDS and WANTS?

• NEEDS – “stuff” we must have to survive, generally: food, shelter, clothing

• WANTS – “stuff” we would really like to have (Fancy food, shelter, clothing, big
screen TVs, jewelry, conveniences . . . Also known as LUXURIES
VS.
 TRADE-OFF
• Is an exchange where you give up one thing in order to get something else that you also
desire.
• Example: a student spends three hours and $20 at the movies the night before an exam. The
trade-off is the time spent studying and the money to spend on something else.
 TRADE-OFFS (CONT.)
What could you have done instead of coming to school today?
 PRODUCTION

• Production is how much stuff an individual, business, country, even the world makes.
• Goods – (tangible) (you can touch it) products we can buy
• Services – (intangible) work that is performed for others
CAPITAL GOODS AND CONSUMER GOODS

• Capital Goods: are used to make other

goods

• Consumer Goods: final products that are

purchased directly by the consumer
Fixed assets which are purchased for long-term use and are not likely to be
converted quickly into cash, such as land, buildings, and equipment.
WHAT ARE FACTORS OF PRODUCTION?
• Factors of production are resources that are the building blocks of the economy; they
are what people use to produce goods and services. Economists divide the factors of
production into four categories: land, labor, capital, and entrepreneurship.
4 FACTORS OF PRODUCTION
• Land- includes any natural resource used to produce goods and services; anything that comes
from the land. Some common land or natural resources are water, oil, copper, natural gas, coal,
and forests. Land resources are the raw materials in the production process
• Labor- is the effort that people contribute to the production of goods and services. Labor
resources include the work done by the waiter who brings your food at a local restaurant as well
as the engineer who designed the bus that transports you to school. It includes an artist's creation
of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been
paid for a job, you have contributed labor resources to the production of goods or services.
• Capital- think of capital as the machinery, tools and buildings humans use to produce
goods and services. Some common examples of capital include hammers, forklifts,
conveyer belts, computers, and delivery vans. Capital differs based on the worker and
the type of work being done. For example, a doctor may use a stethoscope and an
examination room to provide medical services. Your teacher may use textbooks, desks,
and a whiteboard to produce education services.
• Entrepreneurship- an entrepreneur is a person who combines the other factors of
production - land, labor, and capital - to earn a profit. The most successful entrepreneurs
are innovators who find new ways to produce goods and services or who develop new
goods and services to bring to market. Without the entrepreneur combining land, labor,
and capital in new ways, many of the innovations we see around us would not exist.
WHICH FACTOR OF PRODUCTION?
 IMPORTANCE OF STUDYING ECONOMICS
- So, why do we study economics? Here are two reasons why studying economics is
important.
1. Informs decisions- economists provide information and forecasting to inform
decisions within companies and governments.
2. Influences everything- economic issues influence our daily lives. This includes
issues such as tax and inflation. A broad subject, economics provides answers to a
range of social issues that impact households and wider communities.