An Introduction to Economics

Ch 1, Economics 9th ed, Roger A. Arnold

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An Introduction

Economics is a social science (where we want to study and understand the human society)

human societies or economies (e.g. a country, city) face the problem of scarcity

scarcity: human wants are greater than the resources available to satisfy those wants

e.g. 1000 people want cars but there are only 500 cars available (example continued next slide)

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Effects of Scarcity

The following are the effects of scarcity (example continued from last slide):

1) We need to make choices or decisions because of scarcity. E.g. We have to choose which 500 people out of the 1000 will get the 500 cars.

2) Rationing device – A way of deciding who gets the available limited resources. E.g. ‘price’ can be a rationing device. Only those people who can pay the price of the car will get the car.

3) Competition: People will compete to get those 500 cars and also compete to obtain the rationing device (in this case money).

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ContinuedEconomics is defined as the science of scarcity where we the study

how a society (or economy) manages the problem of scarcity.

A society (or economy) is made up of mainly three sectors or actors:

1) consumers (households & individuals) 2) firms or businesses 3) the government

In Microeconomics (ECO 101) we study and try to explain the choicesand decision-making of households and businesses and their interaction in markets.

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Goods and BadsGoods & services (e.g. food, clothes, home, education, cars...) are things that

make us happy, give us satisfaction or benefit.The economic term for happiness or satisfaction or benefit is utility.Therefore, goods give us utility. We are willing to pay for goods. E.g. we are willing to pay for food, clothes, education, etc.

Bads - Anything from which individuals receive disutility (i.e. dissatisfaction) e.g. garbage, fever, air pollution, etc.We are willing to pay for the removal of bads (e.g. we pay the garbage

man to remove garbage and the doctor to remove our fever)

Who makes the goods? Using what?

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Resources / Inputs / Factors of Production

Goods (& services) are produced by firms or businesses. Goods are produced using resources or inputs or factors of production. They are:

• Land – All natural resources (e.g. forests, water, air, etc.)

• Labour – Physical and mental effort of workers in the production process

• Capital – Produced goods that can be used as inputs in the production process (e.g. factories, machines, computers, etc.)

• Entrepreneurship – The talent for organizing the above mentioned resources to produce goods (e.g. The CEO, Chairman, Director)

The skills and knowledge regarding the use of resources is Technology

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Opportunity Cost and Behaviour

Opportunity cost is the next best alternative (or option) given-up (or sacrificed) whenever we make a choice or decision

E.g. You made a decision to read this slide. If you were not reading this slide, what would you be doing? Perhaps you would be spending time with your family or friends. ‘Spending time with family’ is the opportunity cost in that case (you are giving-up this option).

Changes in opportunity cost affect behaviour:The higher the opportunity cost of doing something, the less likely it will be

done. E.g. Your favourite relative has come to visit your home. If you read this slide you will be giving up spending time with him or her. The opportunity cost has increased (i.e. you are giving-up more) and hence you are less likely to read the slides.

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Decision Making (Comparing Benefits and Costs)Remember: One effect of scarcity is that we have to make decisions or

choices.

How is a choice or decision made? According to economic theory, we make decisions by comparing benefits and costs. If benefits are greater than the costs (benefit > costs), then we are likely to do something.

For example, you chose to study at NSU because the benefit of studying at NSU > cost of studying at NSU.

Think about the benefits and costs of studying at NSU.

Opportunity cost is a cost and hence it is included in the cost-benefit analysis. For example, you could have worked instead of studying at NSU; hence, the salary from work is a (opportunity) cost of studying at NSU.

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Efficiency or OptimizationIn our daily life we want to make the best choice (or decision) in a given situation; the best choice gives us the maximum benefit in a given situation (from the given resources). This is the main idea of efficiency and/or optimization in economics.

Efficiency: Obtaining the maximum benefit from the given resourcesOptimization: The best choice or decision in a given situation

For example, we have 1 hour and 30 mins allocated to a lecture (the given resource). If we get the maximum benefit from this 1 hour and 30 mins, then we are being efficient; if we waste our time on useless things, then we are being inefficient.

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Incentive

Something that encourages or motivates us to undertake an activity. E.g. A student might study very seriously for a tuition waiver. The tuition waiver is the incentive for studying seriously.

Incentives affect the behaviour (decisions) of individuals. E.g. without the tuition waiver (incentive) the student may not study very seriously.

Negative Incentive: Something that discourages us to do something. E.g. if you cheat during the exam, you might lose marks. Here, ‘losing marks’ is a negative incentive which should discourage us to cheat.

Changes in incentives affect our behaviour and decision-making. How? Think about it.

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Exchange or Trade

Trade: The giving up of something for something else

E.g. we may give up 10 taka for a cup of tea

A trade has usually two sides: The buying side and the selling side.

People engage in trade or exchange because they expect to be

better-off (happier or more satisfied) after the trade

That is, we will only trade if: the benefit from the trade > cost of the trade. Trade takes place in a market (Ch 3)

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Theory or ModelA simple representation of the real world designed with the intent to better understand and/or explain.

The simplification can be done using assumptions and by focus only on the variables (or factors) that are important to our study.

*E.g. to study the CGPA of a student we can focus on 1) the hours a student studies 2) class attendance. There might be no need to consider factors such as the height and weight of students*

A good theory accurately predicts real world phenomenon. E.g. the *theory above* (about CGPA) predicts that: if a student studies more, then his or her CGPA will increase. If this happens in the real world, then the *above theory* is a good theory.

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Ceteris Paribus

Ceteris Paribus means All other things constant or Nothing else changes

This assumption is essential when we want to study and determine the correct relationship between two variables

For example, someone can say if a person exercises more, then his or her weight will decrease (but this is only true if we assume ceteris paribus, that is if we assume other variables such as food intake is constant, then more exercise will reduce weight).

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Appendix A (Ch 1)

In a model or theory we might be interested to study of the relationship between different variables. There are three possible relationships between two variables:

Directly (Positively) Related: Two variables are directly or positively related if they change in the same way (they both increase or decrease together). E.g. Hours of study ↑ then CGPA ↑ or study hours↓ then CGPA ↓

Inversely (Negatively) Related: The variables change in opposite ways. E.g. hang-out with friends ↑ then CGPA ↓ or hang-out ↓ then CGPA ↑

Independent: Variables are not related. If one changes the other does not change. E.g. temperature on Moon and your CGPA are independent (not related)

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Continued

The relationship between two variables can be represented using graphs. Usually, we place the dependent variable on the y-axis and independent variable on the x-axis. If the variables are directly (positively) related, then we will have an upward sloping graph. E.g. the graph on the right is telling us, if income increases, then consumption (expenditure) will increase

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In case of a negative relationship In case of independence

we will have a downward we might have a vertical sloping graph (as below) or horizontal line (as below).

The graph below tells us, if X changes Y does not change

This graph tells us, Y can change but X remains fixed or constant

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Graphs: Movement and Shift

In ECO 101 and 104, most of the graphical models are based on two important principles.

1) Remember a graph contains two variables. If one of the variables in the graph changes, then there will be a movement along the curve.

E.g. if the income increases from $200 to

300, then there will be a movement along

along the curve from C to D.

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Continued

2) If a relevant variable outside of the graph changes, then the entire curve will shift

E.g. if the price of goods and services

increase, then consumption will decrease

and the entire graph will shift down.

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Please clear these concepts thoroughly before moving on; it will make the chapters ahead easy and interesting. You’ll be able to apply these

concepts even in other courses such as ECO 104.

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