Chapter 1

Nature & Scope

Lecture 1
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 What will we cover in today’s lecture?

• The nature of Economics

• The scope of Economics

• The central problem of Economics

•
• Production Possibility Curve (PPC)
The Nature of Economics
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To sum up… Economics is…
A branch of social science that uses scientific methods to build theories that can
help to explain the behaviour of households, firms, and the government and how
they make decisions relating to the allocation of limited resources to productive
uses, to derive maximum satisfaction.

9
in Uncommon Language
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Understanding some important Economic terminologies…

Ceteris paribus

• Latin phrase meaning all other things being unchanged or constant.

• The assumption of ceteris paribus is used throughout all economic analysis to

make analysis easier. Allows economists to isolate the effect of a single variable
and to better understand the underlying relationships at work.

• Ceteris paribus assumption is a simplification of reality and that in the real world,
many factors are likely to be changing at the same time.
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Understanding some important Economic terminologies…

Positive & Normative Economics
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A positive statement is one that can A normative statement is one that

be tested and verified and is not cannot be tested or verified and is
based on a value judgment. based on a value judgment.

• For example, stating that the current • For example, stating that the price of
level of unemployment is 4.1% is housing is ‘too expensive’ is a
positive because it can be tested normative one as it is based on a value
and either verified or falsified. judgement and cannot be tested to be
Stating that the level of ‘true’ or ‘false’.
unemployment is 20% is also
positive, even if not true – because
the statement can be tested and
falsified.
Which of the following statements is an example of a positive economic
statement?

a. "The government should increase spending to boost the economy.“

b. "Unemployment rates will decrease if the government implements job training

programs.“

c. "Income inequality is morally wrong and should be eliminated.“

d. "The minimum wage should be increased to ensure a living wage for all workers."
When examining economic discussions in a news article, which statement is
likely to be normative in nature?

a. "The unemployment rate has increased by 2% in the last quarter.”

b. "The government's fiscal policy is inadequate to address current economic

challenges.“

c. “The stock market experienced a 10% gain last month.”

d. "Consumer spending patterns have shifted towards online purchases."

The Scope of Economics
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mIcroeconomics mAcroeconomics
Concerned with individual parts of Concerned with the economy as a
the economy whole or aggregate.

Behaviour of Behaviour of
households firms Total amount of spending & output
of goods & services

Demand & supply of specific

markets
The Central Problem of Economics
 Page 1-4

ne ur sh ip
e
Entrepr

SCARCITY!!!
Available resources are unable to produce enough goods and
services that people desire to satisfy all their wants.
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Economic Resources

enn
eeuu
r r
s s
hhipip
nn
EE pp
trtere rer

27
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L a n d

• Refers to all natural resources available for production (to satisfy human wants).

• Land as a renewable natural resource (e.g. wind and water) renews themselves at
a fast enough rate for sustainable economic extraction.

• Land as a non-renewable natural resource (e.g. fossil fuels and mineral ores) do
not renew themselves at a fast enough rate for sustainable economic extraction.

• The reward for land is “rent”.

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o u r
L ab

• Labour refers to work (manual or mental) undertaken by people in the

production of goods and services.

• The reward for labour is “wages”.

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a p i t a l
C

• Capital refers to all man-made materials, physical resources used or are

available for use in production such as production factories, machinery, and
tools.

• The reward for capital is “interest”.

 r shi p Page 1-4 (grey box)

r en eu
r ep
Ent

• Entrepreneurship refers to the factor of production that takes overall

responsibility for the decision-making process in the firm so that other factors
of production can be combined to provide the good or service.

• The reward for entrepreneurship is “profits”.

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Would the
consumption of
all goods involve
a sacrifice?

A.Yes

B.No

C.It depends
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Would the
consumption of all
goods involve a I t d ep e
sacrifice?
n d s !! !

Economic goods Free goods

• Are goods that are produced using • Not produced using scarce
scarce resources. resources.

• Limited in quantity relative to demand • Available in large amounts relative

(i.e. scarce). Hence consumption of to demand (i.e. not scarce). Hence,
such goods involves a sacrifice or an consumption of such goods does not
opportunity cost. involve any opportunity costs.
More about Economic goods… Page 1-4 (grey box)

Tangible Intangible
(Goods) (Services)

Producer Consumer Water

Machinery
(Capital) (Final) bottle
Accounting Haircut
Which of the following is an example of an economic good?

a. Air

b. Sunlight

c. Diamonds

d. Rocks
Water from a natural spring would be considered:

a. An economic good

b. A free good

c. Both economic and free good

d. Neither economic nor free good

Would you
consider all
water to be
free good?
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CHOICE!!!
duce?
to pr o
much
How
at t o How to
Wh ?
od u c e produce? For whom to produce?
pr
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CHOICE!!!

OPPORTUNITY COST!!!
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OPPORTUNITY COST!!!

• Opportunity cost refers to the value of the next-best alternative forgone as a

result of a decision made.

• It is usually measured in terms of goods and services or monetary value of what

is given up.

• It is also known as implicit cost

 Remember to
complete the self-
check questions
relevant to what you
have learnt today!
 Next lesson:
The Production Possibility Curve