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What is Economics

Economics is the social science which deals how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.

1Scarcity and ChoicesScare economic resources means limited goods and services. Scarcity restricts options and demands.

We do choices because we cannot have it all, we must decide what we will have and what we must forgo. 2Purposeful Behaviour Rational self-interest: every on wants to increase utility (satisfaction) obtained from consuming a good or service. Individuals allocate their time, energy and money to maximize their satisfaction (utility). They weigh costs and benefits, so their economics decisions are purposeful, nor random. 3Consumer are purposeful in deciding what goods and services to buy. Business firms are purposeful in deciding what products to produce and how to produce them and what price should be charged for the products. Government entities are purposeful in deciding what public services to provide and how to finance them. 4Summary: Purposeful behaviour simply means that people make decisions with some desired outcomes in mind.

Note: Rational self-interest is not the same as selfishness.

Marginal Analysis: Marginal benefits = Marginal Costs 5Theories, Principles and ModelsObserving real-world behaviour and outcomes. Based on those observations, formulating a possible explanation of cause and effect (hypothesis). Testing this explanation by comparing the outcomes of specific events to the outcomes predicted by the hypothesis. 64. Accepting, rejecting and modifying the hypothesis based on these comparisons.

5. Continuing to test the hypothesis against the facts.

A very well-tested and widely accepted theory is referred to as an economic law or an economic principle. 7Economists develop theories of the behaviour of individuals (consumers, workers, and institutions (business firms and governments)) engaged in the productions, exchange, and consumption of goods and services.

Economic principles and models are highly useful in analysing economic behaviour and understanding how the economy operate. i-Generalization ii-Other-thing-equal assumption

8Microeconomics vs MacroeconomicsMicroeconomics is the part economics concerned with individuals units such as a person, a household, a firm or an industry.

Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates, such as government, household and business sectors. 9Individuals Economizing ProblemsLimited Income: individuals have limited economic resources.

Unlimited wants: Our desires are unlimited. Our wants extend over a wide range of products from necessities (for example, food, shelter and clothing) to luxuries (for example, perfumes, yachts and sport cars). 10Some wants such as basic food, clothing and shelter have biological roots. Other wants, for example, specific kind of foods, clothing and shelter, arise from the conventions of and customs of society.

Because we have limited income, it is our self-interest to economize: to pick and choose goods and services that maximize our satisfaction (utility).

11A budget LineIt is a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.

The graph of budget line: ---- 12Some Important points Attainable and unattainable combinations: the attainable combinations are on and within the budget line; the unattainable combinations are beyond the budget line.

Trade-offs and opportunity costs: Budget line illustrates the idea of trade-offs arising from limited income. The straight-line budget constraint, with its constant slope, indicates constant opportunity cost.

13Choice: Limited income forces people to choose what to busy and what to forgo to fulfil wants ---marginal benefits and marginal costs. The impact of changes in income on budget line ---illustrate with numerical examples.

The impact of price changes on budget line ---illustrate with numerical examples. 14Societys Economizing Problem Scarce Resources: Society has limited economic resources. This includes the entire sent of factory and farm buildings and all the equipment, tools and machinery used to produce all types of goods and services

15Resource CategoriesLand: to the economist land includes all natural resources used in the production process, such as arable land, forests, mineral and oil deposits and water resources.

Labour: The source labour consists of the physical and mental talents of individuals used in producing goods and services. 16Capital: For economists, capital (or capital goods) includes all manufactured aids used in producing consumer goods services. Included are all factory, storage, transportation, and distribution facilities as well as tools and machinery. Economists refer to the purchase of capital goods as investment. Capital goods differ from consumer goods because consumer goods satisfy wants directly, whereas capital goods do so indirectly by aiding the production of consumer goods. 17Entrepreneurial Ability. There is a specific human resource, distinct from labour, called entrepreneurial ability. The entrepreneur performs several functions The entrepreneur takes the initiative in combining the resources of land, labour and capital to produce a good or service. The entrepreneur makes the strategic business decisions that set the course of an enterprise. 18The entrepreneur is an innovator. He or she commercialize new products, new productions techniques or even new forms of business organization. The entrepreneur is a risk bearer. He or she has no guarantee of profit. The reward for the entrepreneurs time, efforts and abilities may be profits or losses. The entrepreneur risks not only his or her invested funds but also those of associated and stockholders as well. 19Because land, labour, capital and entrepreneurial ability are combined to produce goods and services, they are called the factor of production or inputs.

20Production Possibilities ModelAssumptions: - Full employment- Fixed resources- Fixed technology - Two goods: pizza (consumer good) and industrial robot (capital good). 21Production Possibilities TableProduction Alternatives Type of Products

ABCDEPizzas

01234Robots10974022Production Possibilities Curve23PizzasRobotsThis curve displays the different combinations of goods and services that society can produce in a fully employed economyLaw of Increasing Opportunity CostsThe opportunity cost of each additional unit of pizzas is greater than the opportunity cost of the preceding one. Law? As the production of a particular good increases, the opportunity cost of producing an additional unit increases. 24Optimal Allocation How much pizza should be produced?

Answer: Marginal benefit (MB) of pizzas = Marginal cost (MC) of pizzas.

---illustrate graphically: show market price and quantity demanded. 25Unemployment, Growth and the FutureUnemployment and the production possibilities curve ---the concept of economic developmentEconomic growth and the production possibilities curve----increases in resources

Explain graphically 26Present Choices and Future Possibilities The trade-offs between current and future consumption or the trade-offs between consumer and capital goods.

If we will produce more capital goods in current period, then we can increase future consumption. Why?

27International TradeInternational trade enables a nation to obtain more goods than its production possibilities curve indicates.

More choices at low prices, but local industry would be affected badly. Employment level may also be affected by international trade. 28Graphs and Their MeaningConstruction of a GraphA graph is a visual representation of the relationship between two variables. - Scatter Diagram - A Trend Line Direct and Inverse RelationshipsDependent and independent variables

29Slope of a line

= vertical change/horizontal change

Steeper and flatter curves Infinite slope vs zero slope Equation of a Linear Relationship 30Slope of a Nonlinear Curve

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