Introduction to Economics

(Basic assumptions, definitions, scarcity, trade-offs, and Production Possibilities Frontier)

Eko Tjiptojuwono
08124172589 24B200FF

Economics is the study of how society manages its scarce resources to attain the maximum fulfillment of society’s unlimited wants.

Society has unlimited wants and needs

but the resources to satisfy those wants are scarce or limited. Therefore, Society must make choices.

Economics is all about choices!!
(this is called “the economizing problem”)

Key Principles, Assumptions, and Definitions

#1 Society has an unlimited desire for goods and services!

We want everything!

.We want “goods” •A “good” is something that is tangible that satisfies people’s wants and desires.

We want “services” •A “service” is something that is intangible that satisfies people’s wants and desires. .

we must make choices . we can’t have it all. therefore.#2 Because our resources are limited (or scarce).

They seek to maximize their utility .#3 People are rationally selfinterested.

They weigh the marginal benefit against the marginal cost of a decision. for example. Margin means extra. one more piece of cake. We pursue behavior up to MB = MC .#4 People generally make decisions at the margin.

00 $25.00 $0.Marginal Benefit/Marginal Cost Analysis of Purchasing Chipotle Burritos $30.00 $15.00 Marginal Cost $10.00 $20.00 First Second Third Burrito Burrito Burrito Fourth Burrito Marginal Benefit .00 $5.

#5 People respond to incentives in predictable ways! .

#6 People’s choices have consequences that lie in the future .

It is similar to what scientists do when they conduct “controlled experiments. • This allows them to focus on a specific relationship without begin confused by other variables.” .Important terms to know! • Ceteris Paribus: “all other things equal” Economists assume that all other variables except those under immediate consideration are held constant for a particular analysis.

. or foreign sector interact with each other. households.• Microeconomics: Micro means “small” so this indicates that this branch of economics deals with specific or individual economic units. businesses. such as government. • Macroeconomics: Examines the economy as a whole or how its basic subdivisions.

More Terms to Know • Positive economics: focuses on facts and cause-and-effect relationships. Concerned with “what ought to be” . what policy actions should be recommended to achieve a desirable goal. Concerned with “what is” • Normative economics: incorporates value judgments about what the economy should be For example. Avoids value judgments.

More Terms to Know • Consumers: People who purchase goods and services • Producers or Firms: People who supply goods and services • Households: People who supply the factors of production .

The Factors of Production (The resources used to make goods and services) •Land •Labor •Capital •Entrepreneurship .

and water . plants. This includes land as well as ores. minerals. animals.Land • Natural resources that are used to make goods and services.


Sometimes referred to as human capital.Labor • Includes all human resources. both physical and mental. . It includes the knowledge and skills a worker gains through education and experience.

” If they can train a monkey to do it. • Unskilled labor: no prior training. “If they can train you in a day. you’re unskilled. If someone can replace you off the street. you’re unskilled. it’s unskilled • What divides skilled from unskilled is the length of time needed to develop that skill set.Labor • It is a scarce resource because there are only so many individuals who are willing and able to work certain jobs. .

equipment. buildings. Includes tools. consumer goods directly satisfy our wants and needs. . • Capital goods indirectly satisfy our wants and needs vs. machines. factories.Capital • Capital is a human-made resource used to produce other goods and services.


Entrepreneurship • Entrepreneurship is the special ability of risk-takers to combine land. . labor and capital in new ways to make new goods and services in order to make profit.

.Resource Payments (Often called Factor Payments) Producers (firms and businesses) must provide the resource suppliers with a payment for their resources.

Most firms must take out loans to acquire capital equipment. The money they borrow comes mostly from households’ savings. • For CAPITAL: Firms pay households INTEREST. • For ENTREPRENEURSHIP: Households earn PROFIT. • For LABOR: Firms pay households WAGES.• For LAND: Firms pay households RENT. . Firms pay interest on loans.

What good or service could be produced with a box full of money? Money is used as a medium of exchange for the factors of production. .Is money a capital good? • No. money is not a resource.

interest and profit Market for Factors of Production Labor. and capital Income .The Circular-Flow Diagram Revenue Goods & Services sold Firms Market for Goods and Services Spending Goods & Services bought Households Inputs for production Wages. land. rent.

. • In economics. we study two types of markets • Product Markets: Households buy goods and services produced by firms. • Resource Markets: Firms buy productive resources from households.What is a Market? • A market is a place where buyers and sellers come together.

labor. and capital Which way does money flow? What are the goals? From households To firms Which way does money flow? What are the goals? From firms to households Maximize profit (firms) and Utility (households) Maximize income (Households) And minimize costs (firms) .Product Markets Who are the buyers? Households Resource Markets Who are the buyers? Firms Who are the sellers? Firms Who are the sellers? Households What is bought and sold? Goods and services What is bought and sold? Land.

Another Very Important Term to Know: Opportunity Cost .

“THERE’S NO SUCH THING AS A FREE LUNCH!” Everything has a cost. .

but the 3 cups cannot be used to make both. . 3 cups of flour can be used to make a loaf of bread or a cake.Assume flour is a scarce resource.

• Opportunity cost is the next best alternative use for a resource. an opportunity cost is incurred.Opportunity Cost • Once a resource or factor of production has been put to productive use. then the opportunity cost is the cake that could also have been baked with the 3 cups of flour. • If the 3 cups of flour are used to bake bread. .

The Second Model or Graph You need to know is the Production Possibilities Frontier .

we must make choices about how to use our scarce resources. We face tradeoffs when it comes to using available resources. .Review: What is the “Economizing Problem?” • People have unlimited wants but the resources to satisfy those wants are scarce. • Therefore.

Robots Production Possibilities Frontier Pizza .

.Important Terms to Know • Full employment: all available resources are employed • Productive efficiency means that the least costly production techniques are used to produce any particular mix of goods and services. • Allocative efficiency means that resources are used for producing the combination of goods and services most wanted by society.

Suppose you have 4 hours each day you can spend either playing or studying. Identify all of the possible tradeoffs: Play 4 3 2 1 0 Study 0 1 2 3 4 .

you will have your personal Production Possibility Frontier!! 2 1 0 1 2 3 4 Hours Playing .Hours Studying 4 3 If you graph this information.

does not trade with other countries . • Technology is constant during analysis.Assumptions of Production Possibilities Model • Economy is operating efficiently (full employment and full production). • Available supply of resources is fixed in quantity and quality at this point in time. i.e. • Economy is closed. • Economy produces only two types of products or services.

Production Possibilities Frontier • The PPF is the boundary between the combinations of goods and services that can be produced and those that cannot be produce. or individual. firm. given the available factors of production and technology. • It illustrates the possible combinations of goods or services that can be produced by a single nation. .

Points to Understand About the Production Possibility Curve .

Robots 500 400 300 . 400 Production points on the PPF are productive efficient 200 100 600 800 . 1000 Pizza . 200 .

Robots 500 400 300 . 200 100 600 800 . Points on and inside the PPF are attainable. .. 200 . 1000 Pizza . 400 Production points outside the PPF are unattainable.

200 100 600 800 . 200 400 Moving along the PPF and producing more of one good means that less of another good is produced – a tradeoff. 1000 Pizza ..Robots 500 400 300 .

more of some goods and services can be produced without producing less of others. 400 Moving from inside the PPF to a point on the PPF. 200 100 600 800 . . .Robots 500 400 300 . 1000 Pizza . 200 Points inside the curve represent inefficiency or unemployment.

•In a growing economy. the PPF shifts outward •Resource supplies expand in quantity or quality •Technological advances occur .

Robots 600 Production Possibilities Frontier 500 1000 1200 Pizza .

Robots 600 500 Technological advances that favor pizza manufacturing 1000 1200 Pizza .

Robots 600 500 Technological advances that favor robot manufacturing 1000 1200 Pizza .

Production Possibility Frontiers Capital Goods Ym Yo A Y1 B Xo X1 Xm Consumer Goods .

Capital Goods Production Possibility Frontiers Production Y1 Yo C .its resources Xo X1 Consumer Goods . point B its resources or improves the productivity of those means the resources it alreadynot country is has.g. A B It can only produce at points outside the PPF if it inside the PPF finds a way of expanding – e. This will push the PPF using all further outwards.

• Using resources to invest in technological advances. and capital goods represents a choice for future. education.• Using resources to produce consumer goods and services represents a choice for present over future consumption. . This results in greater growth in the future.

• Population diminishes • Factories or transportation facilities are destroyed (World War II) .Can the PPF shift inward? Yes.

Sign up to vote on this title
UsefulNot useful