Economics

Lecture # 1
Chapter 01
Limits, Alternatives, and Choices
Book: Economics (Global edition)
by: McConnell, Brue, Flynn

Chapter 01
Preliminaries
Book: Microeconomics (6th edition)
by: Robert S. Pindyck, Daniel L. Rubinfeld, Prem L. Mehta

Chapter 01
The Fundamentals of Economics
Book: Microeconomics (17th edition)
by: Paul A. Samuelson, William D. Nordhaus
 Outline
• Limits, Alternatives, and Choices
• Economics: Micro vs Macro economics
• The Themes of Microeconomics
• Trade-offs
• Positive vs Normative Economics
• What is a Market
• Competitive vs Non-Competitive Market
• Market Price: Real vs Nominal
• Problem of Scarcity: Limited income and unlimited wants
• Budget Line/Budget Constraint
• Factors of Production
• Production Possibility Frontier
 Limits, Alternatives, and Choices
• Its about Wants and Earnings

• Society has the resources (Input) to make goods

and services (Output) that satisfy our desires

• However, our economic wants far exceed the

productive capacity of our limited resources
(scarcity)
 Limits, Alternatives, and Choices
Unfortunately, our resources are scarce

– Scarcity means that limited resources and

therefore cannot produce all the goods and
services people want
 The Economic Perspective
Purposeful Behavior:
• Human behavior reflects “rational self-interest” 
Utility – the pleasure/happiness/satisfaction
obtained from consuming a good/service
• Consumers: are purposeful deciding what goods
and services to buy
• Business firms: are purposeful in deciding what
products to produce and how to produce them
• Government entities: are purposeful in deciding
what public services to provide and how to
 The Economic Perspective
Marginal Analysis: Comparing Benefits and Costs
• “marginal” means “extra,” “additional,” or “a
change in”
• Should you attend school for another year?
Should you study an extra hour for an exam?
Similarly, should a business expand or reduce its
output? Should government increase or decrease
its funding for a missile defense system?
• Each option involves marginal benefits and,
because of scarce resources, marginal costs
Economics: Micro vs Macro Economics
We live in a world of limited resources, and
economics helps us decide how to use these
limited inputs to satisfy our never-ending list of
wants and needs
Economics:
- It is the study of how societies use scarce
resources to produce valuable commodities and
distribute them among different people
 Cont.
Microeconomics:
- It deals with the behavior of individual economic
units, which may includes consumers, workers,
investors, owners of land, and business firms
- It explains how consumers make purchasing
decisions and how their choices are affected by
changing prices and incomes
 Cont.
Macroeconomics:
- It deals with aggregate economic quantities,
such as the level and growth rate of national
output, interest rates, rate of unemployment
and inflation
 The Themes of Microeconomics
Its all about Limits
- limited income that consumer can spend on
goods and services

- the limited budget and technical know-how

that firms can use to produce things

- the limited number of hours in a week that

workers can allocate to work or leisure
 Cont.
- It is also about the ways to make the most of
these limits, most precisely it is about the
allocation of scare resources
 Cont.
Its all about Limits
- It explains how consumers can best allocate their
limited incomes to the various goods and services
available for purchase

- It explains how workers can best allocate their time to

labor instead of leisure

- It also explains how firms can best allocate limited

financial resources to hiring additional workers versus
buying new machinery
 Cont.
Trade-offs:
- Microeconomics describes the trade-offs that
consumers, workers and firms face and show how these
trade-offs are best made
1. Consumers: Preference to consume or save
- Consumers, based on their preferences, maximizes
their well being by trading off the purchase of more of
some good and less of other, how much income to save
thereby trading off current consumption for future
consumption
 Cont.
2. Workers:
3. To work or get education: People must decide when
to enter the workforce by considering the kind of Job
and corresponding pay scale. One must trade-off
working now (earning an immediate income) for
continued education (hoping of earning a higher
future income)
 Cont.
2. Preference to learn new skill or not: Some people
choose to work for large corporations that offer job
security but limited potential for advancement, while,
other prefers to work for small companies where there
is some opportunity for advancement with less
security

3. Preference for work or leisure: Workers must decide

how many hours per week they wish to work there by
trading off labor for leisure
 Cont.
3. Prices and Markets:
- All the trade-offs are based on price, faced by
consumers, workers and firms
Consumers = Price of products
Workers = Price = Wages/income/salary
Firms = Hire workers/purchase machines (Wage
rate of worker and machine price/cost)
 Positive vs Normative Economics
Positive Economics:
- Positive economics focuses on facts, causes and effect
relationships
- It deals with the observations or predictions of the
facts of economic life
- Positive economics concerns What is
 Cont.
e.g.
1. What will be the impact of an increase in wages
on employment?
2. Taxes in a particular country are above the
average for similar countries
3. Government-provided healthcare increases
public expenditures."
 Cont.
Normative Economics:
- It incorporates value judgements (good or bad)
about how the economy should operate or
what particular policy actions should be
recommended to achieve a desirable goal
- Normative economics embodies subjective
feelings about “what ought to be or what
should be”
 Cont.
e.g.
1. What wage rate should be paid to auto workers
to make them an active member of the society?
2. Taxes in a particular country are too high and
should be lowered
3. The government should provide basic
healthcare to all citizens
 What is a Market?
A market is the collection of buyers and sellers
that, through their interactions, determine the
price of a product or set of products

Buyers: Include:
consumers → purchase goods and services
firms → buy labor, capital, and raw material that
they use to produce goods and services
 Cont.
Sellers: Include:
firms → sell their goods & services
workers → sell their labor services
resource owners → rent land or sell mineral
resources to firms
 Cont.
Competitive vs Noncompetitive Market
Competitive Market: A market has many buyers and
sellers, so that no single buyer or seller has a significant
impact on price
e.g. Most agricultural markets

Noncompetitive Market: In a noncompetitive market,

there is only one seller of a product in the market and no
other sellers are there as a competitor. No close
substitutes are there to compete. Therefore it is
Monopoly
 Cont.
Market Price: Market price is the price of an asset or
product as determined by supply and demand. In a
perfectly competitive market, a single price – the market
price – will usually prevail
 The Economizing Problem
Problem of Scarcity:
- Scarce resources means limited goods and services
- Scarcity restricts options and demand choices because
we can’t have it all, we must decide what we will have
and what we must forgo

Limited Income:
Everyone have a finite amount of income, even the
wealthiest among us / any billionaire – must decide how
to spend his/her money but mostly have limited income
 Cont.
Unlimited Wants:
Wants extend over a wide range of products from
necessities to luxuries
 The Budget Line/Constraint
A budget line/constraint represents all the
combinations of goods and services that a
consumer may purchase at given current price
within his or her given income

In a schedule for a budget line we can show a

various combinations of two products a consumer
can purchase with a specific money income
 Cont.
Attainable and Unattainable:
Suppose Total Income/budget is $120
- To achieve the maximum utility you will spend
the full amount $120
- All combinations beyond the budget line ($120)
are unattainable
 Cont.
Schedule: The Budget Line → total income is $120, two
goods 1. DVDs ($20 for each DVD) & 2. Books ($10 for
each book) Schedule: The Budget Line
Units of DVDs Units of Books Total Expenditure
A 6 0 $120
B 5 2 120
C 4 4 120
D 3 6 120
E 2 8 120
F 1 10 120
G 0 12 120
 Cont.
Graphically:
 Factors of Production
Factors of Production – Inputs:
Commodities or services that are used to produce goods
and services. An economy uses its existing technology to
combine inputs to produce outputs

Factors of Production (FOP):

1. Land: Natural resources, represents the gift of nature
2. Labor: Physical and mental contribution in production
3. Capital: Resources from the durable goods of an
economy, produced in order to produce yet other
goods
 Cont.
FOP:
4. Entrepreneurial Ability: Human resource
- Can combine the resources (land, labor, and capital) to
produce a good or a service
- makes the strategic business decisions
- Innovates
- Bears risk
 Production Possibility Frontier (PPF)
- PPF shows the maximum amount of production that
can be obtained by an economy, given its technologies,
knowledge and quantity of inputs (FOP) available

- The PPF represents the menu of goods and services

available to the society

- It is a curve depicting all maximum output possibilities

for two goods, given a set of inputs consisting of
resources and other factors. The PPF assumes that all
inputs are used efficiently
 Cont.
PPF initially assume
- Full employment: The economy is employing all of its
available resources

- Fixed resources: The quantity and quality of the factors

of production are fixed

- Fixed technology: The state of technology (the methods

used to produce output) is constant
 Cont.
PPF initially assume
- Two goods: The economy is producing only two goods:
pizzas and industrial robots. Pizzas represent consumer
goods, products that satisfy our wants directly;
industrial robots symbolize capital goods, products that
satisfy our wants indirectly by making possible more
efficient production of consumer goods
 Cont.
Alternate Production Possibilities

Production Pizzas Robots

Possibilities (00,000) (000)
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0
 Cont.
Graphically:
 Economic Growth
- When we drop the assumptions that the quantity and
quality of resources and technology are fixed, the
production possibilities curve shifts positions and the
potential maximum output of the economy changes

Increase in Resource Supplies:

- Suppose a country’s population brings about increase
in supplies of labor and entrepreneurial ability and
labor quality also improves over time due to more
education & training
 Cont.
- The development of irrigation system

- New natural resources are being discovered

The net result → 20 years from now the production
possibilities may supersede
 Cont.
Economic Growth and PPF
Production Pizzas Robots
Possibilities (00,000) (000)
A’ 0 14
B’ 2 12
C’ 4 9
D’ 6 5
E’ 8 0
 Cont.
Graphically:
 Cont.
Advances in technology:
- Bring better goods and improved ways of producing
products
e.g. Computer system, Mobile phones, internet etc.

Conclusion:
Economic growth is the result of:
1. Increase in supplies of resources
2. Improvement in resource quality, and
3. Technological advances