INTRODUCTION TO ECONOMICS

Week-1

PSMI Laboratory © 2020

Industrial and Systems Engineering Department - ITS
E-mail: [email protected]
Phone : 0822-3001-1430
 Economics,
an Overview
What is Economics?
What Economics Is All About
• Scarcity: the limited nature of society’s resources
• 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,
how many workers to hire
• how society decides how to divide its resources between national defense, consumer
goods, protecting the environment, and other needs

Resources are allocated

through the combined
choices of million of
households and firms

TEN PRINCIPLES OF ECONOMICS 4

 Macro and Micro Economics

Micro Economics focus on individual in Economy

How households and companies make decision and how they interact
on the market.
Macro Economics looks economy as a whole
Examine broad economic phenomena, including inflation,
unemployment, and economic growth.

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 Economics Theory
Macro Economics Micro Economics
➢ Consumer Behavior
➢ Economics Growth - Utility
➢ National GDP - Preference
- Demand
➢ Aggregate Supply & Demand - Elasticity
• Goods market
• Export – Import ➢ Supplier Behavior
• Inflation - Production theory
- Production cost
- Maximize Profit
➢ Public Policy
- Supply
- Price
- Protection ➢Market mechanism
➢Market structure
3 Problems of Economics
Problem of
Economics

Production
Scarcity Society Needs
Factor

Society Needs

Production Factor 7
 What’s The Biggest
Economic Problem?
Scarcity and Choice

Resources are scarce Choices

People have less The core of economics
resources than they Must be made among limited
would like set of possibilities
Have more one thing means
have less something else
(trade-off)
✓ Choices in society, national and global economy.
✓ Unlimited Wants
✓ Scarce Resources – Land, Labour, Capital
✓ Resource Use
The Key of Economic Problem
The key economic problem for society:
How to reconcile the conflict between people’s virtually limitless
desires for goods and services and the scaricity of resources (labour,
machinery, raw materials) with which these goods and services can be
produced.

Economics explains how and for whom to produce, explains how scarce
resources are allocated between compiting cliams of their use.

“Human wants are unlimited, but resources are not”

Basic Principles of Economics

Meet unlimited requests while available

production factors are limited

Minimize Inputs – Maximize Outputs

Supply Market Demand

The Three Basic Question in Economic

What goods and services How should goods and Who should get the goods
should an economy services be produced? and services produced? –
produce? – should the – labour intensive, land even (equal) distribution?
emphasis be on agriculture, intensive, capital more for the rich? for those
manufacturing or services, intensive? Efficiency? who work hard?
should it be on sport and
leisure or housing?
 Governments play an important part in
modern mixed economies.

They intervene to increase economic

Role of efficiency by correcting situations
where markets do not effectively
Government perform their co-ordinating functions.

They also redistribute income and

wealth in the interests of equity.
 Production Factors

Natural Resources Human Resources Capital

Expertise

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The Relation of Choice and Opportunity Cost

Choice is imperative because of scarcity

Why do individuals have to make choices?

✓ Different alternatives.
✓ Limited income / budget.
The choice implies the sacrifice or forgoing ✓ Limited time.
of some other need or want
✓ Other limitations.

Opportunity cost is the next best alternative

forgone when choice is made or The benefit that
could have been derived from the next best
alternative use of a given resource
Objectives: to earn maximum
Objectives: use money to
profit by choosing the type of
earn resources that give
goods to sell and production
maximum satisfaction
factors to be used
Opportunity Cost
❑ The concept of opportunity cost crucial to understanding individual choice.
❑ The real cost of an item is an opportunity cost:
what we have to give up in order to get it.
❑ Every choice we make means forgoing some other alternative.
❑ “The real cost of something is what you must give up to get it”

Definition – the cost expressed in terms of the next best

alternative sacrificed
Helps us view the true cost of decision making
Implies valuing different choices
 Examples:
The opportunity cost of…
…going to college for a year is not just the tuition, books,
and fees, but also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.

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The Production Possibility Frontier (PPF)

The production possibility The production

frontier (PPF) is a graph that possibility frontier curve
shows all of the combinations of has a negative slope,
goods and services that can be which indicates a trade-
produced if all of society’s off between producing
resources are used efficiently. one good or another.

Assumptions of PPF:
1. There is full employment
2. The economy produces
only two goods
3. There is a fixed resource
endowment (limited Example:
resources)
Capital goods are goods used to produce other goods
4. Technology is constant
and services.
5. Resources are
occupationally mobile Consumer goods are goods produced for present
consumption.
The Production Possibility Frontier (PPF)

✓ Points inside of the curve are Point F is desirable because it yields

inefficient. more of both goods, but it is not
attainable given the amount of
✓ At point H, resources are either resources available in the economy.
unemployed, or are used inefficiently.
The Production Possibility Frontier (PPF)

Point C is one of the possible ❑ A move along the curve illustrates

combinations of goods produced when the concept of opportunity cost.
resources are fully and efficiently ❑ From point D, an increase the
employed. production of capital goods requires
a decrease in the amount of
consumer goods.
The Production Possibility Frontier (PPF)

The slope of the

ppf curve is also
called the
marginal rate of
transformation
(MRT).

The negative slope of the ppf curve reflects the law of increasing
opportunity cost. As we increase the production of one good, we sacrifice
progressively more of the other.
Example

An economy can produce capital good and food as These combinations of output can be illustrated
illustrated the table below: as follows
Questions

▪ What is the opportunity cost of increasing food production from 100

tonnes to 150 tonnes?
▪ How much food must be given up if production of capital goods is
increased from combination D to combination B?
▪ Why is point F unattainable?
▪ Why is point J an inefficient combination?
▪ Any combination of output that lies on the PPF indicates efficiency in
the allocation of resources
▪ Any combination of output that lies within the PPF indicates
inefficiency it the allocation of resources

Note:
1. Opportunity cost is measured by the slope/gradient of PPF
2. The PPF above has a constant slope
Economic Growth
Economic growth is an
increase in the total output of
the economy. It occurs when
a society acquires new
resources, or when it learns to
produce more using existing
resources.

The main sources of economic growth are capital accumulation and

technological advances.
Economic Growth

Outward shifts of the curve represent

economic growth.

An outward shift means that it is

possible to increase the production
of one good without decreasing the
production of the other.
Economic Growth

From point D, the economy can choose any

combination of output between F and G.
Economic Growth

Not every sector of the economy

grows at the same rate.

In this historic example, productivity

increases were more dramatic for
corn than for wheat over this time
period.
Capital Goods and Growth in Poor and Rich Countries

Rich countries devote more resources

to capital production than poor
countries.

As more resources flow into capital

production, the rate of economic
growth in rich countries increases,
and so does the gap between rich
and poor countries.
Shift in The PPF

Causes
1. Technical progress –
technological advancement
2. Increased productivity
(efficiency) of labor
3. Increased capital investment
4. Discovery and exploitation of
new resources
5. Reallocation of resources
6. Producing in accordance with
comparative advantage
End of Session
#1
Next Session:
Supply and Demand