Introduction to

Economics
What is Economics?
Economics is the branch of knowledge concerned with the
production, consumption and transfer of wealth.

It is the study of how scarce resources are allocated to

fulfill the infinite wants of consumers.
NEEDS: are the basic necessities that a person must have in order
to survive
e.g. food, water, warmth, shelter and clothing

WANTS: are the desire that people have

e.g. things that people would like to have, such as bigger homes,
iphones, etc.
 Micro and Macro Economics
Economics is divided into two categories: microeconomics and macroeconomics.
Microeconomics is the study of individuals and business decisions,
while macroeconomics looks at the decisions of countries and governments. It analyzes
entire industries and economies, rather than individuals or specific companies.
Microeconomics focuses on the actions of individual agents within the economy, like
households, workers, and businesses; Macroeconomics looks at the economy as a
whole. It focuses on broad issues such as growth of production, the number of
unemployed people, the inflationary increase in prices, government deficits, and levels
of exports and imports. Microeconomics and macroeconomics are not separate
subjects, but rather complementary perspectives on the overall subject of the
economy.
Micro & Macro economics
The field of economics that
The branch of economics that studies the behavior of the
analyzes the market behavior aggregate economy.
of individual consumers and Macroeconomics examines
firms in an attempt to economy-wide phenomena such
understand the decision- as changes in unemployment,
making process of firms and national income, rate of growth,
households. gross domestic product, inflation
and price levels.
 Positive and Normative Economics
Positive economics describes and explains various economic phenomena,
while normative economics focuses on the value of economic fairness or
what the economy should be.
Positive economics describes and explains various economic phenomena or
the "what is" scenario.
Normative economics focuses on the value of economic fairness, or what the
economy "should be" or "ought to be."
Most public policy is based on a combination of both positive and normative
economics.
 The Economist as Policy Advisor
As scientists, economists make
positive statements,
which attempt to describe the world as it is.
As policy advisors, economists make
normative statements,
which attempt to prescribe how the world should be.
Positive statements can be confirmed or refuted,
normative statements cannot.
Government employs many economists for policy advice
 Positive & Normative Statements

a. Prices rise when the government increases the

quantity of money.
Positive – describes a relationship, could use
data to confirm or refute.
b. The government should print less money.
Normative – this is a value judgment, cannot be
confirmed or refuted.

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Positive & Normative Statements

c. A tax cut is needed to stimulate the economy.

Normative – another value judgment.
d. An increase in the price of oranges will cause an
increase in consumer demand for apples.
Positive – describes a relationship.
Note that a statement need not be true to be
positive.

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 Why Economists Disagree
Economists often give conflicting policy advice.
They sometimes disagree about the validity of alternative
positive theories about the world.
They may have different values and, therefore, different
normative views about what policy should try to
accomplish.
Yet, there are many propositions about which most
economists agree.
The Economic Problem
Unlimited Wants
Scarce Resources – Land,
Labour, Capital
Resource Use
Choices
The Economic Problem
O What goods and services should an economy produce? – should
the emphasis be on agriculture, manufacturing or services, should
it be on sport and leisure or housing?
O How should goods and services be produced? – labour intensive,
land intensive, capital intensive? Efficiency?
O Who should get the goods and services produced? – even
distribution? more for the rich? for those who work hard?
 SCARCITY
The excess of wants resulting from having limited
resources (land, labor, capital and entrepreneurs) in
satisfying the endless wants of people.
It is a universal problem for societies – it is not limited
to poor countries.
To the economist, all goods and services that have a
price are relatively scarce. This means that they are
scarce relative to people’s demand for them.
 Opportunity Costs
All economic questions and problems arise from
scarcity. Economics assumes people do not have the
resources to satisfy all of their wants. Therefore, we
must make choices about how to allocate those
resources. We make decisions about how to spend
our money and use our time.
Opportunity Cost
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
 Opportunity Costs
- The cost of the next best use of your time or money when you
choose to do one thing rather than another is opportunity cost.
- Let's say you have K15. What would you like to spend it on? There
are a number of things you would love to spend K15 on, but let's
imagine there are only three things out there you really want to buy:
crisps, drink, and a doughnut. Look at the price chart below and
answer the questions.
Look at the price chart below and answer the
questions.

Good Price
1. How many drinks can you
buy instead of one
Crisps K 6.50 doughnut?
2. How many packets of crisps
can you buy instead of one
Drink K15.00 drink?

Doughtnut K8.50
Trade Offs
Decisions involve tradeoffs. When you make a choice, you give up an
opportunity to do something else.

The highest-valued alternative you give up is the opportunity cost of

your decision.
 Production Possibility Frontiers
The Production Possibilities Frontier (PPF) is a graph that shows
the combinations of two goods the economy can possibly
produce given the available resources and the available
technology
•Potential output of one economy
•Economy produces only 2 goods
•Assuming fixed amount of land, labour and capital.
•Represents opportunity costs/ trade-offs.
a) The use of production possibility frontiers to depict:
 opportunity cost (through marginal analysis)
 economic growth or decline
 efficient or inefficient allocation of resources
possible and unobtainable production
b) The distinction between movements along and shifts in
production possibility curves, considering the possible causes
for such changes
PPF for the Country ALPHA
The frontier shows the
limit of what can be
produced – all
possible combinations
when all resources are
Guns fully utilized.

Butter
PPF for the Country ALPHA
All resources are
being used to
1500
produce guns.

Guns

Butter
PPF for the Country ALPHA
All resources are
being used to
1500
produce butter.

Guns

2000
Butter
PPF for the Country ALPHA

1100
Guns

1500
Butter
PPF for the Country ALPHA
At point A (and
at any point on
A the frontier),
production is
EFFICIENT.
Guns

Butter
 Efficient production means that all
resources are being fully employed to
produce the most goods and services
possible.

THEREFORE IT IS IMPOSSIBLE TO PRODUCE MORE OF ONE ITEM

WITHOUT PRODUCING LESS OF THE OTHER.
PPF for the Country ALPHA At point B (and
at any point
inside the
frontier),
production is
INEFFICIENT.
Guns B

Butter
Inefficient production means not all resources are
being fully employed – it is still possible to
increase production of both goods.

THIS COULD OCCUR DURING A RECESSION OR

DEPRESSION, OR IN A DEVELOPING COUNTRY.
PPF for the Country ALPHA
A and B represent
tradeoffs. A produces
A more guns, B produces
more butter.

B
Guns

Butter
The PPF can be used to show the opportunity
cost of choosing one alternative over the other.
PPF for the Country ALPHA
The opportunity cost of
A equals the decrease
A in butter: 1100 units.
1400

B
Guns
800

600 1700
Butter
PPF for the Country ALPHA
The opportunity cost of
B equals the decrease
A in guns: 600 units.
1400

B
Guns
800

600 1700
Butter
•Points on the curve represent maximum
possible combinations
•Points inside the curve represent
underemployment or unemployment
•Points outside the curve are unattainable at
present
•Optimal or best product will some point on
the curve. The exact point depends on
society ; this is a normative decision.
 The Shape of the PPF
The PPF could be a straight line, or bow-shaped
Depends on what happens to opportunity cost
as economy shifts resources from one industry
to the other.
◦If opp. cost remains constant,
PPF is a straight line.
If opp. cost of a good rises as the economy produces
more of the good, PPF is bow-shaped.

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 Law of increasing opportunity costs

The slope of PPC becomes steeper, showing

increasing opportunity cost. That is, the
amount of other goods and services that must
be foregone to obtain more of any given
product increases
Economic rationale: economic resources are
not completely adaptable to alternative uses
The PPF can also show
economic growth by
moving outward.
THIS MAY OCCUR DUE TO ADDITIONAL RESOURCES, INCREASING
POPULATION, OR NEW TECHNOLOGY.
PPF for the Country ALPHA
Growth

Guns

Butter
 Changes / Shifts in the PPF
• The whole PPF can shift over time as a result • The PPF can also pivot
of growth in a factor of production or change • E.g as a result of a change in technology
in technology that affects the rate at which one of the
• If labor increases (but also capital, land goods can be produced but does not
etc) affect the other
• If technology changes to allow greater
incremental production of both goods
• That is the process of economic growth!

Wheat Wheat
(tons) (tons)
6,000 6,000
5,000 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
0 0
0 100 200 300 400 500 600 0 100 200 300 400 500 600
Computers Computers
What makes the PPF move outwards?
 Butter Guns

Use the information 700 0

in the table on the 660 100
graph 600 200
500 300
300 400
0 500
Economic systems
The problem of scarcity leads to the three economic
questions
◦What should we produce?
◦How should we produce it?
◦Who should get the products?

◦Who answers these questions?

Types of
Economic Systems
Economic systems are classified
◦based on who answers the three questions
Types of economic systems
◦traditional
◦command
◦market

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Traditional Economy
In a traditional
economy
◦elders answer the
economic
questions
◦based on
traditions

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Traditional Economy
Traditional economies developed
◦ early in human history
Following tradition is seen as a way of
◦ keeping the society safe and healthy
There is pressure on traditional economies to become
modern.
Very few traditional economies exist.

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Command Economy
In a command economy
◦the national government makes all the
economic decisions
Main features
◦government ownership of land and capital
◦government control of labor
◦government control of all economic activity

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Command Economy
A command economy is also called a centrally planned economy
◦ because the national government is also called the central
government, and
◦ the central government plans
◦ all aspects of the economy
Ideally, in a command economy
◦ everyone shares equally in the limited resources

Socialist Economy

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Market Economy
In a market economy
◦ individuals answer the economic questions
Market economies developed with a political philosophy called
democracy
◦ democracy emphasizes individual rights
◦ market economies emphasize individual choice

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Market Economy
A market economy is also called a consumer economy
◦because consumers have a great impact on this economy
Three features of a market economy
◦private property
◦economic freedom
◦market forces

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 Private Property
Private property
◦ individuals have the right to buy
and own
◦ land
◦ capital goods

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Economic Freedom
Economic freedom
◦individuals are free
◦to make their own
economic decisions
◦to start any legal
business
◦to decide what career
to choose
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Economic Freedom
A market economy is also called
◦free enterprise and private enterprise
because
◦enterprise is another term for business
◦people are free to start enterprises
◦private individuals (as opposed to the
government) can start enterprises

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 Command and Market Economies
Features Command Market

Political philosophy Communism Democracy

Socialism
Who answers the Central Individuals
three economic government
questions?
Who controls the Central Market forces
economy? government
Who owns the Central Individuals
economic inputs? government
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 Command and Market Economies
Features Command Market
Main Government Private property
features ownership of land Economic
and capital freedom
Government Market forces:
control of labor supply and
Government demand, profit
control of all motive, and
economic activity competition

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 Command and Market Economies
Features Command Market
Other Centrally planned Capitalism
names economy Capitalist
Communist economy
economy Consumer
Socialist economy
economy Free enterprise
Welfare state Free market
economy
Private enterprise
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 Mixed Economies

Most modern economies are mixed.

Why?
 both market and command economies have
flaws
 market economies are unstable
 command economies are too complicated to
successfully plan and control
For these reasons, there are no pure
command or pure market economies
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 Mixed Economies

In a mixed economy

 both the government and individuals
– are involved in making economic decisions
Four types of mixed economies
 mixed command economy
 transition economy
 mixed socialist economy
 mixed market economy

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 A Continuum

A continuum of economic systems has

 a pure command economy at the left
– total government control
 a pure market economy at the right
– individual and market forces totally in control
A country’s position on the continuum depends on the
amount of government or individual control

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 Continuum of Economic Systems
Pure Pure
Command Market

Cuba China France United States

Sweden
Legend
Amount of governmental control
Amount of individual control

Where on the continuum do

the following countries belong?
Cuba, China, France, Sweden, United States 60