The word economy comes from a Greek word for “one

who manages a household”.

• A household and an economy face many decisions: • Who will work?• What goods and how many of them should

be produced?• What resources should be used in

production?• At what price should the goods be sold?

Society and Scarce Resources:

• The management of society’s resources is important because resources are scarce.

• Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

Economics is the study of how society manages its scarce resources.

microeconomicIs a branch of economics that studies the behavior of individual

household and firms in making decisions on the allocation of limited resources.

One of the goals of microeconomic is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources among

many alternative uses`.

macroeconomicIs a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy.

This includes national, regional, and global economics.

Macroeconomics study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions.

• Efficiency means society gets the most that it can from its scarce resources.

• Productivity is the amount of goods and services produced from each hour of a worker’s time.

• Factor of productions are any commodities or services used to produce goods and services.

• Production efficiency occurs when the economy is utilizing all of its resources efficiently, producing most output from least input.

• Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone.

• Allocative efficiency occurs when there is an optimal distribution of goods and services.

Production-Possibility Frontier (PPT)

Is a graph that represents all possible combinations of goods an economy or firm can produce when all production factors are fully employs and used efficiently.

FOOD

CLOTHING

AB

C

D

E

F

In the PPT, all point on the curve are points of maximum productive efficiency (no more output can be achieved from the given input.)

All points inside the frontier can be produced but productively inefficient.

All points outside the curve cannot be produced with the given, existing resources.

EXERCISEEconomy produce shirts and pants under the given production functions:

Number of workers

1

2

3

Number of pants

356

Number of workers

123

Number of shirts

58

10

Question No 1If the economy produce 5 pants effectively, then the number of shirts is:

1) 82) 103) 54) Not possible to know.5) Incorrect answers

Question No 2Production of 10 shirts involves relinquishing of:

1) 3 pants2) 5 pants3) 6 pants4) 16 pants5) Incorrect answers.

Question No 3The point where the economy produces 5 shirts and 8 pants:

1) Is not possible2) Possible and effective3) Possible and not effective4) Effective and not possible5) Incorrect answers

Economic growth and regression

In the long run, if technology improves or if the productivity or supply of factors of production increases, the economy’s capacity to produce both goods increases.

(economic growth occurs)

Conversely, a natural, military or ecological disaster might move the PPT to the left, in response to a reduction in an economy productivity.

( economic regression occurs)