V What is Economics?

V Economics is the study of decision making in the face

of scarce resources

V Important point Ȃ resources are scarce

V This implies that individuals and societies must

choose
V 2icro Ȃ individual units, eg. households and
firms
V 2acro Ȃ economy as a whole Ȃ national
economies
V 2acro is based on micro
V iositive = what is or will be = objective

V Normative = what should be = subjective

V On economic theory is a set of ideas about the
economy that has been organized in a logical
framework egs. the theory of the firm, the law of
demand
V On economic model is a mathematical representation,
based on economic theory, of a firm, a market or some
other entity
V O simplification is a representation of a problem in a
form that is more easily understood without loss of
information
V Obstraction involves ignoring non-vital details in order
to focus on the most important aspects of a problem
V eteris iaribus Ȃ with other things the same
V Ollows us to analyze the relationship between two
variables
V O graph typically illustrates the relationship between
two variables
V General formula for the equation of a straight line:

V Where y = variable on the vertical axis


x = variable on the horizontal axis

Ê
m = slope
c = y-intercept
V i = 4 Ȃ 2Q

V Two points Ȃ (Q1,i1) and (Q2,i2)

V I choose (0,4) and (2,0)

V Two ommon Fallacies:
1. iost-Hoc Fallacy Ȃ after this therefore
because of this

2. Fallacy of omposition Ȃ what is true for

part is true for the whole
V acarcity Ȃ the problem of infinite human needs and
wants in a world of finite resources
V Therefore choices have to be made
V This leads us to the concept of opportunity cost
V ½pportunity cost is the value of the next best
alternative that the decision maker is forced to forgo
V If resources are fixed, in order to produce more of one
good a country must produce less of something else
V Efficiency is the absence of waste

V Economic efficiency is the concept that nothing more

can be accomplished or achieved given the available
resources
V It is impossible to make anyone better off without
making someone worse off
V It is impossible to produce more output without using
more input
V iroduction occurs at the lowest possible per unit cost
V iroductive efficiency Ȃ the economy is using all its
resources and technology to produce the maximum
amount of output
V The iiF shows the maximum amount of a good that
can be produced for any given amount of another good
given the economyǯs technology and the factors of
production available
V Ony point along the iiF represents attainable efficient
production
V Ony point inside the iiF is attainable but inefficient
V Ony point outside the iiF is unattainable
V If the economy is operating within the iiF some
resources are unemployed and/or we are not using the
most advanced technology
V It has a negative slope

V It is bowed outwards Ȃ represents the principle of

increasing opportunity cost
V Economic growth is an increase in the productive
capacity of an economy
V It is represented by an outward shift of the iiF
V an be cause by an increase in resources and/or an
improvement in technology
V What?

V How?

V For Whom?
V ommand Economy Ȃ the government

V Laissez-Faire/Free 2arket Ȃ the market

V 2ixed Economy - both

V The Basic Decision-2aking Units
V Households Ȃ consuming units
V Firms Ȃ producing units
V iroduct/½utput 2arkets

V Factor/Input 2arkets
V Land
V Labour
V apital
V The outer loop represents the flow of dollars
V The inner loop represents the flow of goods and
services

V Households sell their labour to firms

V Firms use labour to produce goods and services
V Firms sell goods and services to households
V Households buy from firms

V Firms use revenue to pay wages

V Remainder goes to owners of firm as profit

V - income = expenditure = value of output

V The quantity of a good demanded is the amount of
that good that an individual is willing and able to buy
in a given time period, at a particular price
V The demand curve is the relationship between the
quantity of a good that consumers are willing and able
to buy and the price of the good
V The demand curve slopes downwards reflecting the
law of demand
V It has a negative slope
V It cuts the quantity axis
V It cuts the price axis
V The price of the good
V Income and wealth
V Tastes and ireferences
V Expectations
V irices of Related Goods2
V 2arket demand is the quantity of the good that all
consumers in a market will buy at a particular price

V It is the sum of the individual demand curves of all

consumers in a particular market
V Quantity supplied is the amount of a particular good
that a firm would be willing and able to offer for sale in
a given time period, at a particular price
V The supply curve shows the quantity of a good that
producers are willing to sell at a given price
V The curve is upward sloping reflecting the law of
supply
V It has a positive slope

V It intersects the price axis

V The price of the good
V ost of inputs
V Technology
V irices of Related iroducts
V 2arket supply is the sum of all that is supplied by all
producers in a single market per period
V Equilibrium occurs when quantity demanded is equal
to quantity supplied
V Ot any price above the equilibrium price there is a
surplus
V Ot any price below the equilibrium price there is a
shortage
V ahifts in the demand and/or supply curves will cause
changes in equilibrium
V We move from micro to macro analysis by aggregating
or combining the individual markets into one overall
market
V aome argue that this ignores distinctions among
different products
V ½thers argue differences between goods are
insignificant when analyzing economy wide issues
V Domestic iroduct = the total value of all goods and
services produced in the economy in a year
V irice = overall price level = average price

V OD = aggregate demand = the economy wide demand

for output
V Oa = aggregate supply = the total amount of output
that firms supply
V OD curve = a diagram showing the relationship
between the price level and the economy wide demand
for output

V Oa curve = a diagram showing the relationship

between the price level and the total amount that
firms supply