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Topic 1 Basic Concepts of Economics

This document provides an introduction to basic economic concepts. It defines key terms like scarcity, choice, cost, benefit, and incentives. It explains that economics studies how individuals and societies make choices to cope with limited resources. It also introduces the differences between microeconomics and macroeconomics. Another key concept discussed is the production possibilities frontier (PPF), which illustrates the tradeoffs between producing different goods that arise from scarcity. The document concludes with sample questions from an economics textbook.

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Kuganeswari Pugalenthiran
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104 views17 pages

Topic 1 Basic Concepts of Economics

This document provides an introduction to basic economic concepts. It defines key terms like scarcity, choice, cost, benefit, and incentives. It explains that economics studies how individuals and societies make choices to cope with limited resources. It also introduces the differences between microeconomics and macroeconomics. Another key concept discussed is the production possibilities frontier (PPF), which illustrates the tradeoffs between producing different goods that arise from scarcity. The document concludes with sample questions from an economics textbook.

Uploaded by

Kuganeswari Pugalenthiran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Topic 1:Basic Concepts

of Economics
BAFF0014: Economics and Society
2
Introduction

• All economic questions and problems arise because human wants


exceed the resources available to satisfy them.

Image from: www.stockfresh.com 3


Scarcity

• Scarcity is the condition that arises because wants exceeds the


ability of resources to satisfy them.
• Faced with scarcity, we must make choices—we must choose
among the available alternatives.
• The choices we make depend on the incentives we face.

4
Definitions and Questions

• Economics is the social science that studies the choices that


individuals, businesses, governments, and entire societies make
as they cope with scarcity, the incentives that influence those
choices, and the arrangements that coordinate them.
• Economics divides into two parts:
• Microeconomics: The study of the choices that individuals and businesses
make and the way these choices interact and are influenced by
governments.
• Macroeconomics: The study of the aggregate (or total) effects on the
national economy and the global economy of the choices that individuals,
businesses, and governments make.

5
Definitions and Questions

• Faced with scarcity, we must make choices—we must choose


among the available alternatives.
• How do choices determine what, how, and for whom goods and
services get produced?
• What, How, and For Whom?
• Goods and services are the objects (goods) and actions (services) that
people value and produce to satisfy human wants.
• What goods and services get produced and in what quantities?
• How are goods and services produced?
• For Whom are the various goods and services produced?

6
The Economic Way of Thinking

• Six ideas define the economic way of thinking:


• Choice is a tradeoff
• Cost is what you must give up to get something
• Benefit is what you gain from something
• People make rational choices by comparing benefits and costs
• Most choices are “how much” choices made at the margin
• Choices respond to incentives

7
The Economic Way of Thinking

• A Choice Is a Tradeoff
• Because we face scarcity we must make choices.
• To make a choice we select from alternatives.
• Whatever choice you make, you could have chosen something else.
• You can think about your choices as tradeoffs.
• A tradeoff is an exchange—giving up one thing to get something else.
• Cost: What You Must Give Up
• Opportunity cost is the best thing that you must give up to get something—
the highest-valued alternative forgone.
• Benefit: What You Gain
• Benefit is the gain or pleasure that something brings.
• Benefit is measured by what you are willing to give up
8
The Economic Way of Thinking

• Rational Choice
• A rational choice is a choice that uses the available resources to best
achieve the objective of the person making the choice.
• We make rational choices by comparing costs and benefits.
• How Much? Choosing at the Margin
• A choice made at the margin is a choice made by comparing all the
relevant alternatives systematically and incrementally.

9
The Economic Way of Thinking

• Marginal Cost
• Marginal cost is the opportunity cost of a one-unit increase in an activity.
• The marginal cost of something is what you must give up to get one
additional unit of it.
• Marginal Benefit
• Marginal benefit is what you gain when you get one more unit of
something.
• The marginal benefit of something is measured by what you are willing to
give up to get one additional unit of it.
• Making a Rational Choice
• You make a rational choice when you take those actions for which
marginal benefit exceeds or equals marginal cost.

10
Production Possibilities Frontier

• Production Possibilities Frontier


• The boundary between the combinations of goods and services that can
be produced and the combinations that cannot be produced, given the
available factors of production and the state of technology.
• The PPF is a valuable tool for illustrating the effects of scarcity and its
consequences.

11
Production Possibilities
• Figure 3.1 shows the PPF for cell
phones and DVDs.
• Each point on the graph
represents a column of the table.
• The line through the points is the
PPF.
• The PPF puts three features of
production possibilities in sharp
focus:
• Attainable and unattainable
combinations
• Efficient and inefficient production
• Tradeoffs and free lunches

12
The Opportunity Cost

• The Opportunity Cost of a Cell Phone


• The opportunity cost of a cell phone is the decrease in the quantity of
DVDs divided by the increase in the number of cell phones as we move
along the PPF.

13
The Opportunity Cost

14
Increasing Opportunity Cost

• The opportunity cost of a cell phone increases as more cell phones


are produced.

15
Class Exercise

• From the book: Vengedasalam, D and Madhavan, K. (2013)


Principles of Economics 3rd Edition. Oxford
• Multiple choice question: Questions 1, 2, 4,10, 11, 13, 14, 15
• Structured question: Questions 1, 3 and 4
• Essay question: Question 9

16
References:
Bade (2015) Essential Foundations of Economics.
Pearson

17

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