INTRODUCTION TO ECONOMICS 1. What to produce?

(What kinds of goods and services

should be produced?)
Economics comes from the Greek word “oikonomia,” which 2. How much to produce? (In what quantities should the
means management of a household. It is also a social science goods and services be produced?)
that studies the optimum allocation of limited human and non- 3. How to produce? (What productive resources are used
human resources among their alternative uses in order to satisfy to produce goods and services? In what combination?)
the unlimited needs and wants of people. Economics is the study 4. For whom to produce? (Who gets to have the goods
of how people, institutions, and society make economic choices and services?)
under conditions of scarcity. 5. How can production grow? (Production should
4 Major Functions of Management: planning, leading, increase every year.)
organizing, and controlling.
3 Types of Economic Systems:
Microeconomics (MicroE) 1. Traditional Economy
Major problem of economics: Scarcity means that society 2. Command Economy
has limited resources and therefore cannot produce all the 3. Market Economy
goods and services people wish to have. The management of 4. *Most countries are…Mixed Economies! (Maarket +
society’s resources is important because resources are scarce. Command)
What choices do we make everyday? What major/important
choices have we made in our lifetime? What choices will we be Traditional Economy (Subsistence Economy)
making in the future? An economic system in which economic decisions are
based on habits, customs, traditions, beliefs, practices. People
Economic Resources/Factors of Production: will make what they always made & will do the same work their
1. Natural Resources – land, sea, air parents did. Exchange of goods is done through bartering—
2. Human Resources – labor force trading without using money.
3. Capital Resources – machines, tools, equipment, Who decides what to produce? People follow their customs
infrastructure (airport, irrigation systems, etc.) and make what their ancestors made.
4. Entrepreneur Who decides how to produce goods & services? People
5. Dollars grow & make things the same way that their ancestors did.
Who are the goods & services produced for? People in the
Economic Needs and Wants village who need them.
Examples: villages in Africa and South America, the cultural
Maslow’s Hierarchy of Needs: minorities, the indigenous tribes in the Cordilleras, the
Level 1: Physiological Needs Aborigines in Australia.
Level 2: Safety/Security Needs
Level 3: Social Needs/Belongingness Command Economy (Planned Economy)
Level 4: Self Esteem/Ego Government makes all economic decisions & owns most of
Level 5: Self Actualization the property. Governmental planning groups determine such
things as the prices of goods/services & the wages of workers.
Factors that create additional wants: This system has not been very successful & more and more
1. Population growth countries are abandoning it.
2. Rising income Who decides what to produce? Government makes all
3. Advertising economic decisions.
4. Scientific research Who decides how to produce goods and services?
5. Urbanization Government decides how to make goods/services.
Who are the goods and services produced for? Whoever
How to solve the problem of scarcity? the government decides to give them to.
System is an orderly grouping of interdependent Countries with communist governments have command
components linked together according to a plan to achieve a economies. Examples: There are no truly pure command
scientific objectives. Example: family, school, church, economic systems, but close countries are: North Korea, former
community, workplace, political, etc. Soviet Union, Cuba. Germany and Russia have moved away
Economic Systems describes how a country’s economy is from having a command economy since 1991. Now they have a
organized: solution to the economic problem of scarcity. mixed economy.
Because of the problem of scarcity, every country needs a
system to determine how to use its productive resources. Market Economy (Free Enterprise Economy)
Scarcity is not having enough of something. An economic An economic system in which production and distribution
system must answer 5 questions. questions are answered by prices and profits (supply and
demand). Most of the resources are owned by private citizens.
 Economic decisions are based on free enterprise Microeconomics looks at the individual unit—the
(competition between companies). Important economic household, the firm, the industry. It sees and examines the
questions are not answered by govt. but by individuals. Govt. “trees.”
does not tell a business what goods to produce or what price to
charge. 2. Macroeconomics
Who decides what to produce? Businesses base decisions ‘Macro’ means large. It deals with the behavior of the large
on supply and demand and free enterprise (price). aggregates in the economy. The large aggregates are total
Who decides how to produce goods and services? saving, total consumption, total income, total employment,
Businesses decide how to produce goods. general price level, wage level, cost structure, etc.
Who are the goods and services produced for? Consumers. Macroeconomics looks at the whole, the aggregate. It sees
There are no truly pure market economies, but the United and analyzes the “forest.”
States is close. In a truly free market economy, the government
would not be involved at all. There would be no laws to protect The Diverse Fields of Economics
workers from unfair bosses. There would be no rules to make • Behavioral economics
sure that credit cards were properly protected. Uses psychological theories relating to emotions and social
Many societies have chosen to have some rules to protect context to help understand economic decision making and
consumers, workers, and businesses (mixed). These rules policy. Much of the work in behavioral economics focuses on the
reduce the freedoms that businesses have, but they also protect biases that individuals have that affect the decisions they make.
the workers and consumers.
• Comparative economic systems
Mixed Economy Examines the way alternative economic systems function.
Market + command = mixed. What are the advantages and disadvantages of different
There are no pure command or market economies. To some systems?
degree, all modern economies exhibit characteristics of both
systems and are often referred to as mixed economies. Most • Econometrics
economies are closer to one type of economic system than Applies statistical techniques and data to economic
another. problems in an effort to test hypotheses and theories. Most
Businesses own most resources and determine what and schools require economic majors to take at least one course in
how to produce, but the government regulates certain industries. statistics or econometrics.
Who decides what to produce? Businesses.
Who decides how to produce goods and services? • Economic development
Businesses, but the government regulates certain industries. Focuses on the problems of low-income countries. What
Who are the goods and services produced for? Consumers. can be done to promote development in these nations?
Most democratic countries fall in this category (there are no Important concerns of development for economists include
truly pure market or command economies). Examples: Brazil, population growth and control, provision for basic needs, and
Mexico, Canada, UK, US, Germany, Russia, Australia, etc. strategies for international trade.

Which economic system is best? • Economic history

Market system has proven to be best because it promotes Traces the development of the modern economy. What
the goals of growth, freedom, & efficiency. Citizens are free to economic and political events and scientific advances caused
own their own property and use it in the most efficient and the Industrial Revolution? What explains the tremendous growth
profitable way. and progress of post-World War II Japan? What caused the
Command and traditional systems sometimes offer more Great Depression of the 1930s?
security, but are not nearly as strong in efficiency, growth,
freedom, and environmental quality. • Environmental economics
Studies the potential failure of the market system to account
fully for the impacts of production and consumption on the
2 BRANCHES OF ECONOMICS environment and on natural resource depletion. Have alternative
public policies and new economic institutions been effective in
1. Microeconomics correcting these potential failures?
‘Micro’ means small. It is the part of economics concerned
with individual decision-making units, such as a consumer, a • Finance
worker, or a business firm. We measure the price of a specific Examines the ways in which households and firms actually
product, the number of workers employed by a single firm, the pay for, or finance, their purchases. It involves the study of
revenue or income of a particular firm or household, or the capital markets (including the stock and bond markets), futures
expenditures of a specific firm, government entity, or family. and options, capital budgeting, and asset valuation.
 • Health economics Incentive is something that induces a person to act, i.e. the
Analyzes the health care system and its players: prospect of a reward or punishment. Rational people respond to
government, insurers, health care providers and patients. It incentives. Marginal changes in costs or benefits motivate
provides insight into the demand for medical care, health people to respond. The decision to choose one alternative over
insurance markets, cost-controlling insurance plans (HMOs, another occurs when the alternative’s marginal benefits exceed
PPOs, IPAs), government health care programs (Medicare and its marginal costs!
Medicaid), variations in medical practice, medical malpractice,
competition versus regulation, and national health care reform. How people interact:
• Principle #5: Trade can make everyone better off.
• The history of economic thought Rather than being self-sufficient, people can specialize in
Which is grounded in philosophy, studies the development producing one good or service and exchange it for other goods.
of economic ideas and theories over time, from Adam Smith in Trade allows people to specialize in what they do best. Countries
the eighteenth century to the works of economists such as also benefit from trade and specialization: Get a better price
Thomas Malthus, Karl Marx, and John Maynard Keynes. abroad for goods they produced. Buy other goods more cheaply
Because economic theory is constantly developing and from abroad than could be produced at home.
changing, studying the history of ideas helps give meaning to
modern theory and puts it in perspective. • Principle #6: Markets are usually a good way to
organize economic activity.
A market economy is an economy that allocates resources
THE 10 PRINCIPLES through the decentralized decisions of many firms and
households as they interact in markets for goods and services.
How people make decisions: Market is a group of buyers and sellers (need not be in a single
• Principle #1: People face tradeoffs. location). “Organize economic activity” means determining what
To get one thing, we usually have to give up another thing. goods to produce, how to produce them, how much of each to
All decisions involve tradeoffs. Example: Having more money to produce, and who gets them. Households decide what to buy
buy stuff requires working longer hours, which leaves less time and who to work for. Firms decide who to hire and what to
for leisure. produce.
Society faces an important tradeoff: efficiency vs. equality.
Efficiency is when society gets the most from its scarce • Principle #7: Governments can sometimes improve
resources. Equality is when prosperity is distributed uniformly market outcomes.
among society’s members. Tradeoff is to achieve greater Market failure occurs when the market fails to allocate
equality, could redistribute income from wealthy to poor. But this resources efficiently. Causes of market failure: Externalities,
reduces incentive to work and produce, shrinks the size of the when the production or consumption of a good affect bystanders
economic “pie.” (e.g. pollution). Market power, a single buyer or seller has
substantial influence on market price (e.g. monopoly). When the
• Principle #2: The cost of something is what you give up market fails (breaks down) government can intervene to
to get it. promote efficiency and equity.
Making decisions requires comparing the costs and benefits
of alternative choices. The opportunity cost of an item is what How the economy as a whole works:
you give up to obtain that item. The opportunity cost is the • Principle #8: The standard of living depends on a
relevant cost for decision-making. Example: The opportunity country’s production.
cost of seeing a movie is not just the price of the ticket, but the Standard of living may be measured in different ways: by
value of the time you spend in the theater. There is no such thing comparing personal incomes and by comparing the total market
as a free lunch. value of a nation’s production.
Gross National Product (GNP)
• Principle #3: Rational people think at the margin. Gross Domestic Product (GDP)
Rational people systematically and purposefully do the best Gross National Income (GNI)
they can to achieve their objectives. Rational people make Net National Income (NNI)
decisions by evaluating costs and benefits of marginal changes,
incremental adjustments to an existing plan. Marginal changes • Principle #9: Prices rise when the government prints
are small, incremental adjustments to an existing plan of action. too much money.
Example: When a student considers whether to go to college for Inflation is an increase in the overall level of prices in the
an additional year, he compares the fees & foregone wages to economy. One cause of inflation is the growth in the quantity of
the extra income he could earn with the extra year of education. money. When the government creates large quantities of money,
the value of the money falls.
• Principle #4: People respond to incentives.
 • Principle #10: Society faces a short-run tradeoff
between inflation and unemployment.
Short-run: 1 – 2 years. Many economic policies push
inflation and unemployment in opposite directions. The Phillips
Curve illustrates the tradeoff between inflation and
unemployment.

Inflation Unemployment