INTRODUCTION TO

ECONOMICS The
Basic Concepts
RGFrancisco
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Topics to be discussed

What is Economics
Basic Economics Question
Micro and Macro Economics
Inflation/Recession
Opportunity Cost
3 Basic Questions
4 Factors of Production
 What is
Economics?

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 What is
Economics?
A social science that studies
and influences human behavior
Economics is the study of what
constitutes rational human
behavior in the endeavor to
fulfill needs and wants.
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 Economics is the social science
concerned with the problem of scarcity

The social science concerned with how

individuals and societies decide how to
satisfy there unlimited wants given our
limited resources.

A branch of social science concerned

with the factors that determine
the production, distribution,
and consumption of goods and services.
 The Foundation of
Economics
The
Father

Adam Smith (1723 - 1790)

Authorof the famous book "An Inquiry into the
Nature and Causes of the Wealth of Nations " - 1776

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 The Foundation of
Economics
Scarcity
Scarcity refers to our limited resources and our
unlimited wants and needs.
For an individual, resources include time,
money and skill.
For a country, limited resources include natural
resources, capital, labor force and technology.

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 Needs vs. Wants.
Human wants are unlimited.
We live in a world of limited
resources.
The above leads to scarcity.
People try to balance needs
and wants.
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 ECONOMICS

MICRO MACRO

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 Micro Economics
Micro Economics studies how the individual parts
of the economy make decisions to allocate
limited resources
Microeconomics studies:
how individuals use limited resources to meet
unlimited needs
the consequences of their decisions
the behavior of individual components like
industries, firms and households.
how individual prices are set
what determines the price of land, labor and
capital
inquire into the strengths and weaknesses
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of
the market mechanism.
 Macro Economics
Macroeconomics studies about the functioning
of the economy as a whole
It examines the economy through wide-lens.
Macroeconomics studies about
the total output of a nation
the way the nation allocates its limited
resources of land, labor and capital
the ways to maximize production levels
the techniques to promote trade
After observing the society as a whole, Adam
Smith noted that there was an "invisible hand"
turning the wheels of the economy: a market
force that keeps the economy functioning.
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Goods items/products we value or desire
tangible goods
intangible goods

Services items of value provided to consumers, such

as education.

Economic goods scarce goods created from scarce

resources goods that are desirable but limited in
supply.

Bads items we do not desire or want, where less is

preferred to more.

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The Factors of Production

Labor
Labor Capital
Capital
Land
Land Organization
Organization

Product
Product

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 3 Basic Economic Questions

What to produce?
With limited resources, deciding what is needed
the most is often a factor in determining what
will be produced.
What is the need or want of this product?
What is the point of making a product that no one
is going to buy. Businesses need to make money
so they choose products that people want.
3 Basic Questions Cont

How should it be produced?

Technology, labor, capital, etc.
getting the lowest cost to make the product.
Are we going to make the product from scratch or
will a machine be making the product.
What will each option cost?
Will
having new technology allow us to lower our
expenses?
3 Basic Questions Cont

Whom should it be produced for?

Who is going to use this product?
Most goods and services are distributed to
individuals through a price system.
Productscan also be distributed through
other means; force, first come, lottery,
majority, etc.
 ECONOM
Y

MARKET COMMAN MIXED

D

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 Market
Economies
In a pure market
economy there is no
government
involvement in
economic decisions.
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Contd
The Government lets the market answer
the following three basic economic
questions:
1. What ?
Consumers decide what should be produced
in a market economy through the
purchases they make.
2.How ?
Production is left entirely up to businesses.
Businesses must be competitive in such an
economy and produce quality products at
lower prices than their competitors.
3.For whom ? 20

In a market economy, the people who have

 Command
Economies
In a command economy
the Government takes
economic decisions.

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Contd.
 Command
Economies
In a command economy the
Government answers the three basic
economic questions.
1.What?
A central planning committee decides what
products are needed.
2.How?
Since the Government owns all means of
production in a command economy, it
decides how goods and services will be
produced.
3. For Whom ? 22

The Government decides who will get what

 Mixed Economies

In the Mixed economies the

Government and the
Market work together in
decision making

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Contd
 The Economic Problem

Unlimited Wants
Scarce Resources Land, Labour,
Capital
Many Uses of Resources
Choices

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 The Economic Problem

What goods and services should an economy

produce?
should the emphasis be on agriculture,
manufacturing or services, should it be on
sport and leisure or housing?
How should goods and services be produced?
labour intensive, capital intensive?
Who should get the goods and services
produced? Even distribution? More for
the rich? For those who work hard?

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 What is Utility?

Satisfaction
Can not be measured
Marshall Utility can be measured in Utils

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What are kinds of
Utility?

Form Utility
Place Utility
Time Utility

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 Form Utility
Inwhat form is a product
available
Whole chicken
Chicken parts
Cooked chicken

Value at each step is different

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 Place Utility

The place where is a product available

Convenience

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 Time Utility

When is a product available

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Rational Behavior

People know what they want

Their behaviors are consistent with what
they want
Assume that the market information is
given.

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 Opportunity Cost

Definition the cost expressed in terms of

the next best alternative sacrificed
The cost of anything in terms of other
things given up or sacrificed.

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Production Possibility Frontiers
PPF Shows the different combinations of
goods and services that can be produced
with a given amount of resources
No ideal point on the curve
Any point inside the curve suggests
resources are not being utilised efficiently
Any point outside the curve not attainable
with the current level of resources
Useful to demonstrate economic growth and
opportunity cost
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Production Possibility Frontiers
If it devotes all
Capital Goods IfIf
it the
Assume country
a its is
reallocates
resources to
at point
country
resources
capital
A
can onitthe
(moving
round thegoods
PPF from A
PPF
produce
could It cantwo
produce a
Ym to B) it can produce
produce
types
maximum
more consumerthe
of goods
of Ym.
goods
combination
with
but onlyits of Yo
at the expense
ofIf it devotes
fewer capital all its
goods.
capital
resources goods and
Yo A resources
The
Xo
opportunity
consumer
capital
to cost of
goods
consumer
producing angoods
extra Xoit
X1goods
and
could consumer
produce
consumer a is
goods
Yogoods
Y1 capital
maximum of goods.
Xm

Y1
B

Xo X1 Xm Consumer Goods
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 Production Possibility Frontiers
It can only produce
atProduction
points outside the
inside
PPF thea way
if it finds
Capital Goods ofPPF
expanding
e.g.its
resources or
point Bthe
improves
means the
productivity of those

Y1
C resources
countryit is already
not
has. This will push
using all its
A the PPF further

.
Yo resources
outwards.

Xo X1 Consumer Goods
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Business Cycle
Parts of the Business Cycle

Peak (boom) Highest point in the economic

cycle.
Economy is at its best and will likely begin to contract.
Recession(contraction) decline in the economies
performance that could lead to depression.
Not long term and does not always impact other
economies
Business Cycle contd

Trough (depression) A sustained economic downturn

that impacts our economy and that of other
countries.
Lowest economic point
Recovery (expansion)- Economic activity begins to
pick up and depression begins to end.
Economic growth occurs
Recap

What are the three basic economic

questions?
Compare and contrast micro and
macro economics.
Explainthe circular flow of income
and output as it relates to the
economy.
Describe the business cycle.
Inflation

The rate at which the general level of prices for

goods and services is rising, and, subsequently,
purchasing power is falling.
As inflation rises, every dollar will buy a smaller
percentage of a good. For example, if the inflation rate is
2%, then a Php1 pack of gum will cost Php1.02 in a year.
 Recession
A significant
decline in activity across the
economy, lasting longer than a few months.
Itis visible in industrial production, employment,
real income and wholesale-retail trade. The
technical indicator of a recession is two consecutive
quarters of negative economic growth as measured
by a country's gross domestic product (GDP).
A recession generally lasts from six to18 months,
and interest rates usually fall in during these months
to stimulate the economy by offering cheap rates at
which to borrow money.
 What is the connection
between Inflation and
Recession?
Which came first the inflation or the recession?
Inmany cases the causes of recession can be
confusing. Can inflation cause/worsen a recession?
Or does a recession cause/worsen inflation?
Botha recession does not always have a single cause, but
can be caused by many factors. Once a recession begins, its
impact is usually felt all over the economy, including
inflation. Inflation occurs without a recession, but a
dramatic change in the value of money can push an unstable
economy into a recession.
Look at the causes or influences of our
most recent recession

Poor business practices started the recession

It was likely on its way already
Inflation
Decline in the stock market
Increased foreclosures/ drop in housing prices
In Short

Economics is common sense made confusing

We cant have everything that we want, so we have to

make choices with our money.
Businesses have to make choices with their products.
Society has to make choices about how it should or will
function.
The Government makes choices about laws and
expenses.
Just to name a few!!!
Chapter Review
What is the basic Economic question?
What does a production possibilities curve show us?
What are the four factors of production?
What are trade offs and opportunity costs?
What are the three basic economic questions?
Define microeconomics and macroeconomics.
What are inflation and recession?
Howdoes the circular flow of income and output impact the
economy?