SECTION ONE: THE NATURE OF ECONOMICS

LESSON ONE - INTRODUCTION TO ECONOMICS

Economics is the study of human behavior as individuals, firms and governments seek to satisfy
unlimited wants with limited resources.

Economic study is often done on two levels:

Microeconomics studies the economic behavior of individuals, markets, and firms

Macroeconomics looks at the entire economy or its major aggregates and sectors. It is the sum of
all the individuals, markets, and firms.

Economic Statements

Economic perspectives can be expressed as positive statements or normative statements.

 Positive statements focus on facts and are concerned with “what is data” These statements
are based on empirical investigations.

 Normative statements are economic concepts and issues based upon opinions that cannot be
tested. Normative statements suggest what ought to be and answer policy statements based
on value judgement.

Economist view people as rational decision-makers who make choices based on self-interest.
Economists use the scientific method to arrive at the generalizations contained in the principles,
laws, theories or models put forward. The hypothesis to explain observed phenomenon →
empirical data→ theories principles and laws.

Economists construct these models and theories to explain and predict economic behaviour.

Abstraction is a necessary part of building economic theories. This means ignoring many details
to focus on the most important factors in a problem Abstractions are necessary to understand the
functioning of anything as complex as the economy For example the ceteris paribus or “other
things being equal” assumption is used to limit the influence of other factors when generalizing.
Ceteris Paribus:

Ceteris paribus or all other factors being equal simple means that when you’re trying to establish
a relationship between two variables (eg. Price and quantity), to establish a sensible relationship,
economists have to say ceteris paribus so that all other factors that may affect price and quantity
are being suppressed (like income, taste, preference, brand loyalty, price of other goods etc.).
This means that, yes, we know that people’s income may affect how much quantity of goods
they buy, and this would affect price, however, since we’re only trying to look at the relationship
between price and quantity only we have to assume that the effect of income on price and
quantity is held constant or equal (means that income does not change, so it won’t affect price or
quantity)

Theories

Theories are simplified means of explaining the mechanism behind observed phenomena.
Models are simplified means of representing a real-world situation. Theories/models are often
expressed in graphs, equations or words for example.

Main Agents of the Economy

 Firm: a business, a private institution. Produces the goods and services the household uses.

 Government Provides a framework of laws and rules. Runs the economy and sometimes is
involved in its production.

Circular Flow Chart

A diagram which displays the cycle of the economy’s dollar flow. It shows this flow through the
market among households and firms and how they are structured by the government through
rules and laws. The flow chart outlines the flow of inputs and outputs and the flow of dollars.
 Term Definition
production (also called a production possibi
possibilities the different combinations of tw
curve (PPC) all its resources are efficiently em
resources and opportunity costs.
growth an increase in an economy's abil
time; economic growth in the PP
PPC.
contraction a decrease in output that occurs
a graphical model of the PPC, a
point that is further away from, a
constant when the opportunity cost of a g
opportunity good increases, which is represe
costs for example, if Colin always giv
time he produces a Pokemon car
increasing when the opportunity cost of a g
opportunity increases, which is represented i
costs the origin; for example, Julissa g
produces the first Pokemon card
Pokemon card, so she has increa
productivity (also called technology) the abil
increase in productivity causes e
resources have not changed, whi
the PPC.

The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity
costs of choices when faced with the possibility of producing two goods or services. Points on
the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC
are unattainable. The opportunity cost of moving from one efficient combination of production to
another efficient combination of production is how much of one good is given up to get more of
the other good.

TERMS TO NOTE

Barter

To exchange goods and services without the use of currency.

Capital Goods

The assets used by businesses in the course of producing their products and services, and can

include buildings, tools, machinery and equipment.

Choice

The ability of a consumer or producer to decide which good, service or resource to purchase or

provide a range of possible options.

Consumer Goods

Any tangible commodity produced and subsequently purchased to satisfy the current wants and

perceived needs of the buyer.

Consumption

The final purchase of goods and services by the consumer.

Demerit Good

A good or service whose consumption is considered unhealthy, degrading or otherwise socially

undesirable, due to perceived negative effects on the consumer.

Economic Good

A commodity or service that is of benefit to society with no opportunity cost.

Economic System
The means by which societies and governments organise and distribute available resources,

goods and services across a geographic region, state or country.

Economy

A complex system of interrelated production, consumption and exchange activities that

ultimately determine how resources are allocated among all participants.

Efficiency

An economic state in which every resource is optimally allocated to serve each individual in the

best way while minimizing wastage.

Employment

The state of holding a job, in which there is a wage or salary paid.

Free Goods

A good that does not require scarce resources for its production, and thus has no opportunity

cost.

Free Rider

Someone who wants others to pay for a public good that they plan to utilize.

Income

The amount of money, property and other transfers of value received over a set period in

exchange for services and products.

Macroeconomics

The study of how an overall economy (the markets, businesses and governments) behave. It

examines phenomena such as inflation, national income, gross domestic product and rate of

economic growth.

Merit Good
Goods are thought to be socially desirable and are likely to be under-produced and under-

consumed through the market mechanism.

Microeconomics

The study of individuals and firms to allocate resources of production, exchange and

consumption.

Money Cost

The actual cash cost incurred in the production and sale of marketable goods and services.

Needs

Commodities that are essential for human survival.

Normative Economics

The branch of economics that aims to determine people’s desirability, or the lack thereof to

various economic programs and conditions by asking what the economy ought to be.

Opportunity Cost

The forgone benefit that would have been derived from choosing one alternative over another.

Positive Economics

The objective analysis in the study of economics. Conclusions drawn from positive economics

can always be tested and are backed by factual data.

Production

An activity carried out under the control and responsibility of an institutional unit that uses

inputs of labour, capital, goods and services to produce outputs of goods and services.

Production Possibility Curve

A graph that shows all the different combinations of output that can be produced given current

resources and technology.

A commodity or service that is made available to all members of society.

Resources

A commodity used to produce goods and services to satisfy human wants and needs.

Scarcity

When the demand for a resource is greater than the supply of that resource, as resources are

limited.

Wants

Any non-essential commodity that an individual may desire.