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Ch. 1 Economic Issues & Concepts

This document provides an overview of key economic concepts including: 1) Economics involves making choices due to scarce resources and unlimited wants. Resources include land, labor, and capital. 2) Opportunity cost is the value of the next best alternative given up when choosing an option. It is illustrated using production possibility frontiers which show tradeoffs between goods. 3) Microeconomics examines allocation of resources and prices while macroeconomics analyzes total output, employment and economic growth at an aggregate level.

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Varun Sanjay
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38 views

Ch. 1 Economic Issues & Concepts

This document provides an overview of key economic concepts including: 1) Economics involves making choices due to scarce resources and unlimited wants. Resources include land, labor, and capital. 2) Opportunity cost is the value of the next best alternative given up when choosing an option. It is illustrated using production possibility frontiers which show tradeoffs between goods. 3) Microeconomics examines allocation of resources and prices while macroeconomics analyzes total output, employment and economic growth at an aggregate level.

Uploaded by

Varun Sanjay
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ch.

1 Economics Issues and Concepts


 Economics is the study of the use of scarce resources to satisfy
unlimited human wants.
 Scarcity is inevitable and is central to all economies and all
economic problems.
Resources
The resources are classified into three categories:-
1. Land- includes all natural endowments, such as arable land,
forests, lakes, crude oil, and minerals.
2. Labour- includes all mental and physical human resources,
including entrepreneurial capacity and management skills.
3. Capital- includes all manufactured aids to production, such as
tools, machinery, and buildings.

 These resources are called Factor of Production, as they are used


to produce the things that the people desire.
 What is produced is divided into goods and services:-
1. Goods are tangible (e.g., cars and shoes)
2. Services are intangible (e.g., legal advice and education).

 The act of making the goods and services is called production


 The act of using the goods and services is called consumption.

Opportunity Cost
The opportunity cost of choosing any one alternative is the value of the
next best alternative that is given up.
 The opportunity costs of the two activities are inverses of one
another.

 Opportunity cost of a movie includes:-


1. Cost of the movie ticket
2. Cost of getting to and from the theater
3. Value of whatever I would do during that time

 Opportunity cost of going to university includes:-


1. Your best alternative option (assume it is working)
2. Cost of tuition, books, fees etc
3. Lost wage by not working
Note: Opportunity cost of going to university does not include living
expense.

Production Possibilities Frontier (PPF)


PPF is a graph showing the possible combination of output.
 Points above and to the right of this curve cannot be attained
because there are not enough resources, points below and to the
left of the curve can be attained without using all of the available
resources, and points on the curve can be attained only if all the
available resources are used efficiently.
 It has a negative slope because when all resources are being used
efficiently, producing more of one good requires producing less of
others.
 If production changes from point a to point b, an opportunity cost
is involved.
 A production possibilities boundary illustrates three concepts:
scarcity, choice, and opportunity cost. Scarcity is indicated by the
unattainable combinations outside the boundary; choice, by the
need to choose among the alternative attainable points along the
boundary; and opportunity cost, by the negative slope of the
boundary.
 Concave to the origin, indicates that the opportunity cost of either
good increases as we increase the amount of it that is produced. A
straight-line boundary would indicate that the opportunity cost of
one good stays constant, no matter how much of it is produced.
 Growth in a country’s productive capacity can be represented by
an outward shift of the production possibilities boundary. If an
economy’s capacity to produce goods and services is growing,
some combinations that are unattainable today will become
attainable in the future.
Microeconomics & Macroeconomics

Microeconomics is the study of the causes and consequences of


the allocation of resources as it is affected by the workings of the
price system and government policies that seek to influence it.
Questions relating to what is produced and how, and what is
consumed and by whom, falls under microeconomics.

Macroeconomics is the study of the determination of economic


aggregates, such as total output, total employment, and the rate
of economic growth. Questions relating to the idleness of
resources and the growth of the economy’s productive capacity
falls under macroeconomics.

Flow of Income & Expenditure


 Individuals sell the services of the factor they own in what are
collectively called factor markets.
 Producers sell their outputs of goods and services in what are
collectively called goods markets.
 The prices that are determined in these markets determine the
incomes that are earned.
 The distribution of income refers to how the nation’s total income
is distributed among its citizens. This is largely determined by the
price that each type of factor service receives in factor markets.
Production & Trade
Specialization of labour: The specialization of individual workers in the
production of particular goods or services.
 Two reasons why specialization is efficient compared to self-
sufficiency:
1. Individual abilities differ, and specialization allows individuals
to do what they can do relatively well while leaving everything
else to be done by others. The economy’s total production is
greater when people specialize than when they all try to be
self-sufficient.
2. It concerns over the improvements in people’s abilities that
occur because they specialize. A person who concentrates on
one activity becomes better at it as they gain experience
through their own successes and failures.
Division of labour: The breaking u of a production process into a series
of specialized tasks, each done by a different worker.
Note: A successful barter transaction thus requires what is called a
double coincidence of wants.

Globalization
Globalization, a term often used loosely to mean the increased
importance of international trade.
Two major causes of globalization are the rapid reduction in
transportation costs and the revolution in information technology that
have occurred in the past 50 years.
Types of Economic Systems
1. A traditional economy is one in which behaviour is based
primarily on tradition, custom, and habit. Young men follow their
fathers’ occupations. Women do what their mothers did. There is
little change in the pattern of goods produced from year to year,
other than those imposed by the vagaries of nature.
2. In command economies, economic behaviour is determined by
some central authority, usually the government, or perhaps a
dictator, which makes most of the necessary decisions on what to
produce, how to produce it, and who gets to consume which
products and in what quantities.
3. In the third type of economic system, the decisions about
resource allocation are made without any central direction.
Instead, they result from innumerable independent decisions
made by individual producers and consumers. Such a system is
known as a free-market economy or market economy. Economy
based on free-market transactions is self-organizing.
4. In mixed economies, economic behaviour is the result of some
mixture of central control and market determination, with a
certain amount of traditional behaviour as well.

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