1. An Introduction to Economics
Lecture 1
An Introduction to Economics

2. Announcements
Dr. Nkechi S. Owoo
Office Location: Main Building, Room W15B
Office Hours: Fridays, 9- 11am
Other Instructors
Dr William Bekoe
Dr Monica P. Lambon- Quayefio
Class Representative
Course Outline and Weekly slides
2015_16\Econ 101 Syllabus_ docx
Interim Assessment
To be announced

3. Definition of Economics
What is Economics?

4. Economics, Scarcity, and Choice
Study of choice under conditions of scarcity
Allocation of scarce resources among unlimited wants
Scarcity
Situation in which the amount of something available is insufficient to satisfy the desire for it

5. Scarcity and Individual Choice
Unlimited variety of scarcities, based on two basic limitations:
Scarce time
Limited number of hours in each day to satisfy our desires
Scarce spending power
Cannot afford to buy more of the things we want

6. Scarcity and Individual Choice
Limitations force each of us to make choices
Economists study
Choices
Consequences of those choices
Indirect effects of individual choice on our society
When the effects are harmful, economists study what can be done about then. Eg. Traffic and pollution

7. Scarcity and Social Choice
Society faces a scarcity of resources to satisfy goals (???)
Categories of resources:
Labor
Time spent by human beings in producing goods and services
Capital
Long-lasting tool used to make other goods and services
Human capital e.g. skills and knowledge possessed by workers
Physical Capital e.g. machinery and equipment, factory buildings, computers, hammers, etc
Land/natural resources
Physical space on which production takes space + natural resources
Entrepreneurship
Ability and willingness to combine other resources into a productive enterprise

8. Scarcity and Social Choice
As a society, resources insufficient to produce all the goods and services we desire
For example, do we require a more educated citizenry?
More labour to build classrooms and teachers to teach
More land to set up buildings on
More capital like bull-dozers, etc
Same resources could be used to produce other things that we also find useful e.g. hospitals, homes, defense, etc

9. Scarcity and Economics
Scarcity of resources is the source of all problems studied in economics:
the scarcity of resources and the choices it forces us to make
Households – have limited income to allocate among goods and services
Firms – production is limited by costs of production
Government agencies – the budget is limited, so goals must be carefully chosen

10. Scarcity and Economics
Economics studies decisions made by households, firms and governments to:
Explain how economic system operates
Forecast the future of the economy
Suggest ways to make the future better

11. More Concepts and terminology

12. Microeconomics
What is Microeconomics?

13. Microeconomics Micro comes from the Greek word mikros, meaning “small”
Studies the behavior of individual households, firms, and governments
Choices they make
Interaction in specific markets
Focuses on individual parts of an economy

14. Macroeconomics
What is Macroeconomics?

15. Macroeconomics Macro comes from the Greek word makros, meaning “large”
Studies the behavior of the overall economy
Focuses on big picture and ignores fine details

16. Sample Questions
Classify the following topics as relating to microeconomics or macroeconomics
A family’s decision about how much income to save
The effect of government regulations on auto emissions
The impact of higher national savings on economic growth
A firm’s decision about how many workers to hire
The relationship between the inflation rate and the changes in the quantity of money

17. Positive and Normative Economics
Positive economics/ statements: how the economy works
Can be true or false
Need not be sensible or even accurate
E.g. Government policy has no effect on our standard of living
Can be tested by looking at the facts
Normative economics: what should be
Value judgments, identify problems, and prescribe solutions
Cannot be proved or disproved by the facts alone

18. Sample Questions Are these statements positive or normative
An increase in the personal income tax will slow the growth rate of the economy
The goal of any country’s economic policy should be to increase the well-being of its poorest, most vulnerable citizens

19. The Concept of Opportunity Cost
What is Opportunity Cost?

20. The Concept of Opportunity Cost
Opportunity cost of any choice
What we must forego when we make that choice
Next alternative, affordable want that is foregone
Accurate and complete concept of cost
What is the opportunity cost of your university education?

21. Opportunity Cost for Individuals
The opportunity cost of a choice includes
Explicit cost
The dollars sacrificed - and actually paid out for a choice
Implicit cost
The value of something sacrificed when no direct payment is made

22. Opportunity Cost and Society
Arises from the scarcity of society’s resources
Our desire for goods is limitless
Limited resources to produce them
To produce more of one thing
Society must shift resources away from producing something else

23. A model of Society’s Opportunity Cost
Economic models
Abstract representation of reality
Should be as simple as possible to accomplish its purpose
Use economic models to develop economic theories
Economic models are built with words, diagrams, and mathematical statements

24. Production Possibilities Frontiers model
Production Possibilities Frontier (PPF)
A curve showing all combinations of two goods that can be produced with the resources and technology available
Assumptions
Only two goods produced in economy (military goods and consumer goods)
Fixed resources
Fixed technology
Tabular illustration
Quantitative measure of opportunity cost
Opportunity cost of having more of one good measured in the units of the other good that must be sacrificed
At B, if society currently produces 1000 tanks, the opportunity cost of 1000 more tanks is 100,000 bushels of wheat

25. Production Possibilities Frontiers
Graphical Illustration
PPF shows maximum quantity of wheat that can be produced for each quantity of tanks (or v.versa)
Points outside the PPF
Unattainable
Points on or inside the PPF
Attainable

26. Production Possibilities Frontiers
The Production Possibilities Frontier
Number of Tanks per Year
Bushels of Wheat
per Year
100,000
200,000
300,000
400,000
500,000
1,000,000
950,000
850,000
700,000
all resources are
used for wheat
Moving from point A to point B
requires shifting resources out
of wheat and into tanks A B C D E
all resources are
used for tanks F

27. Increasing Opportunity Cost
The law of increasing opportunity cost
The more of something we produce, the greater the opportunity cost of producing even more of it
Each time tank production rises by 1000, wheat production falls by more and more
Illustration with table
Why?
Explains
The concave (upside-down bowl) shape of the PPF
Why the PPF becomes steeper as we move rightward and downward

28. Increasing Opportunity Cost
The law of increasing opportunity cost
The more of something we produce, the greater the opportunity cost of producing even more of it
Each time tank production rises by 1000, wheat production falls by more and more
Illustration with table
Why?
Because most resources are better suited to some purposes than to others.

29. The PPF, Productive Inefficiency and Recessions
There is no such thing as a free lunch- Milton Friedman
Producing more of one thing requires us to pay an opportunity cost by producing less of something else…
Possible Violation?
Operating inside the PPF:
Productive inefficiency
Recessions

30. Productive Inefficiency
The Production Possibilities Frontier
Number of Tanks per Year
Bushels of Wheat
per Year
100,000
200,000
300,000
400,000
500,000
1,000,000
950,000
850,000
700,000 A B C D W E F

31. Productive Inefficiency
Would an economy ever operate inside its PPF?
All resources are being used, but not in the most productive way
Wheat farmers used in tank production and tank producers working on farms
Increase production of one good without decreasing production of the other good
Solution would be to better match workers’ skills to available jobs
No firm, industry or economy ever 100% productively efficient
Productive inefficiencies not that rampant

32. Recessions A slowdown in overall economic activity
Many resources are idle
Widespread unemployment
Factories shut down
Land and capital are not being used
Economy is at a point inside its PPF

33. Economic Growth and the PPF model
Economy’s productive capacity grows so produce more of everything
Factors contributing to economic growth
Increase in the quantities of available resources
Physical capital
Human capital
Technological change
New ways to produce more from a given quantity of resources

34. Economic Growth Economic Growth and the PPF (a) Wheat
(bushels per year)
Additional resources or technological advance affect only the wheat production e.g. improved seeds A’
1,200,000 H A
1,000,000 J
700,000 D F
3,000
5,000
Tanks
per Year

35. Economic Growth Economic Growth and the PPF (b) Wheat
(bushels per year)
1,200,000 A
1,000,000
Additional resources or technological advance affect only the tank production D
5,000
6,000
Tanks
per Year

36. Economic Growth Economic Growth and the PPF (c) Wheat
(bushels per year)
Additional resources or technological advance affect the production of both goods
1,200,000
1,000,000 D
5,000
6,000
Tanks
per Year

37. Assigned Reading
Economic Systems and Resource Allocation

38. Next Class DEMAND Markets the demand schedule and the demand curve;
The law of demand
Market demand and individual demand
factors influencing quantity demanded;
changes in quantity demanded vs. changes in demand