Introductory
Concepts
Chapters 1 & 2
The Basics
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Economics defined
Economics is defined as “the social science
concerned with the problems of using scarce
(limited) resources to attain maximum
fulfillment of society’s unlimited wants.”
 Without scarcity (limited resources) there would be NO
reason to study economics.
 Can you really have it all? No….not according to
economic theory!
Please!
No more Econ!
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What is Economics About?
It is concerned with how society tries
meeting people's demands for things they
want to consume.
It studies production, consumption and sale
of goods and services, both at the level of
individual products, businesses and
consumers and at the level of the total
production and consumption by countries.
It also compares alternative ways of using
the limited resources that countries and
individuals possess.
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Macro- vs Micro-Economics
Macroeconomics (large scale): the study of
national and global economies (highly “aggregated” units)
(EXAMPLES: USA, Britain, European Union)
“Aggregated” = “total”
This study comes later in the semester
Microeconomics (small scale): the study of
individual decisions and markets (narrowly defined units)
EXAMPLES: you buy a movie ticket verses a pizza
Basically, we study single product markets, like IPODS, and
how prices for those goods are set.
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Wants vs. Needs
1. Society’s material wants, that is, the
material wants of its citizens and institutions
are virtually unlimited (we will never be
satisfied)
2. Economic resources, which are the means
of producing goods and services are limited
or scarce.
3. Two fundamental facts constitute the
“Economizing problem” and provide a
foundation for the study of economics.
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What’s causing the Economizing Problem?
 What is a “material want”?
1. “the desire of consumers to obtain
and use various goods and services
that provide utility.”
 Utility is defined as any good or
service that gives pleasure or
satisfaction “utility = happiness”.
 Some goods are necessities
(needs) others are luxuries (wants).
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Bigger Wants
 Businesses want factory buildings,
machinery, trucks warehouses,
communications systems etc.
 Governments reflecting the collective wants
of its citizens or goals of its own, seeks
highways, mass transportation systems,
schools, and military equipment.
However, full utility cannot be achieved. Why?
…because of scarcity.
So, economists hope to achieve economic equity
(equality). So that, at least, everyone is treated
fairly, even if NO ONE is fully satisfied.
The problem gets bigger! Give me
MORE!
Material wants have a high reproduction rate in
today’s markets:
– The rapid introduction of new products wets our
appetites
– Extensive advertising persuades us that we need
items we might not otherwise desire.
EXAMPLES: IPODS, XBOX,
COMPUTERS, LUXURY CARS, ETC.
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What are Economic Systems?
 An Economic System is:
…an institution that deals with the
production, distribution and consumption
of goods and services in a society.
 There are 3 types of economic systems
in the world.
 Market
 Command
 Mixed
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Economic Systems
GOAL: of all economic study and
activity is to satisfy diverse material
wants (keeping in mind that resources
used to make them are scarce)
If this is the GOAL…how do we achieve
it? What questions should we ask?
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The Goal of Economic Systems
 The 3 Fundamental Economic Questions
individuals, businesses, and nations
must ask in order to start an effective &
efficient economic system:
1. For whom will it be produced?
2. What will be produced?
3. How will it be produced?
REMEMBER: WHAT, HOW, FOR WHOM
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3 Types of Economies
1. Market economies (also called capitalism)
A method or organization that allows unregulated prices
and decisions of private property owners to resolve the
basic economic problems.
(NO GOVERNMENT REGULATION)
Examples: New Zealand & Ireland
2. Command economies (also called communism)
An economy where the government control all means of
production.
(TOTAL GOVERNMENT REGULATION)
Examples: CUBA & North Korea
3. Mixed economies (also called free enterprise)
An economy where the government regulation AND
private business control the factors of production.
Examples: USA, Europe, most superpowers
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Economic Systems?
Economic Systems Chart
Command
Market
Mixed
Role of government
Decides all economic
activity
Little or no role of
govt.
Govt. creates laws
and regulates
business activities
Freedom of choice
No Freedom of
choice
Consumers and
producers have
freedom of choice
Limited freedom of
choice given govt.
controls
Ownership of natural
resources
Public sector
Private sector
Both public and
private sector
Price determination
Govt. sets prices
Price mechanism
system determines
price
Price mechanism
system but regulated
by govt.
Which sector answers
the basic economic
questions?
Public sector
Private sector
Both public and
private sector
Whose ideas are these?
1. Market economies (capitalism)
2. Command economies (communism)
3. Mixed economies (free enterprise)
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Adam Smith (1723 – 1790)
The Father of Economics
1776 – Wealth of Nations
Free markets and private ownership will provide
jobs, profits, and an increasing standard of
living.
“Pure Capitalism”
(Market economy = no government regulation)
All economic activity is governed by an
“invisible hand” or market competition (greed)
– “If you leave a economy alone, people’s need for
goods will be enough to keep the economy
going”
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Pure Capitalism
Private ownership of factors of production.
Business choose what to sell, who to sell to,
and set prices.
Consumers choose what to buy and where
to buy it.
Economic Freedom!! NO Govt. intervention.
PROBLEMS WITH CAPITALISM:
 Flow of information and goods is not balanced.
 Unequal distribution of power and wealth.
 Basically, the poor can be really poor and the rich can be
very rich.
 No Govt. regulation of wages, education or business. (ex.
Pollution..)
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Karl Marx (1818 – 1883)
 1887 wrote Das Kapital
 “Communism”: The govt., representing
the people, should own all factories and
companies. (public goods)
 All people will have their needs taken
care of through the govt. control of
resources.
 Problem? What if Govt. does not do
what is in the best interest of the
people?
Who owns the factors of production in a command economy?
ANSWER: THE GOVERNEMNT
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John Maynard Keynes (1883 – 1946)
 1936 wrote - The General Theory of Employment,
Interest and Money
 1930’s The Great Depression hit hard (government needed
a new, more regulated, economy)
 Keynes stated that government should use spending
and taxation to stabilize the market.
 Some believe his theories helped America win WWII
 Adam Smith would not have agreed.
 The U.S Economy is governed by his theories..
This system is call a Mixed Economy
 Somewhat free market for growth and
government intervention for stability
and full employment.
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Where do they stand?
Communism /
SOCIALISM
Karl Marx
Keynesian
ECONOMICS
John Keynes
AUSTRIAN ECONOMICS /
Capitalism
Free
Enterprise
Economists
Adam Smith
The Foundation of Economics
What do each of the 3 economic
systems (market, command, mixed)
have in common? “Economic
resources are limited in supply or
scarce.”
 What are economic resources? All
natural, human, and manufactured
resources which go into the production
of goods and services.
These are called the… 4 FACTORS
OF PRODUCTION.
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The Factors of Production
(REMEMBER “CELL”)
1. Capital
2. Entrepreneurship
3. Land
4. Labor
The Factors of Production
1. Capital - (two types of capital)
Capital Goods (physical capital)
– This factor includes all elements (manufactured) that aid
production, that is, all man-made tools, machinery,
equipment, and factory, storage, transportation, and
distribution facilities used in the producing goods and
services and getting them to the consumer.
Human Capital (mental know-how)
– This factor includes people’s ability to learn a new task.
– Sometimes referred to as Human Resources, this
resource is the most important, especially as the
industries of the world use more and more technology.
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The Factors of Production
2. Entrepreneurial Ability
– The Entrepreneur (someone who starts a
business) performs three related functions:
1. The entrepreneur is the driving force behind
production.
2. The Entrepreneur makes basic business policy
decisions: decision maker
3. The entrepreneur is a risk taker.
3. Labor
– Labor is a broad term for all physical and
mental talents.
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The Factors of Production
4. Land (natural resources)
To the economist, land is not just real
estate!
Land is all natural resources usable in
the production process.
 Such resources as land, forests,
minerals, oil deposits, air, water
and virtual resources come under
the classification.
Remember the word “C.E.L.L.”
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Review
• What are the 3 fundamental economic
questions?
• Which economic system is Adam Smith
associated with? Karl Marx? John Keynes?
• What is scarcity?
• What are the 3 economic systems?
• What are the 4 factors of production?
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How do these
Factors of Production
flow in any economy?
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The Circular-Flow of Goods Diagram
FLOW OF GOODS AND SERVICES
Revenue
Spending
Product Market
Goods &
Services sold
Firms SELL here
Households BUY here
Goods &
Services
bought
IMPORTANT!!
Example of question:
What do households and
firms do in the factor
(resource) market?
Firms
Inputs for
production
Factor Market
Households
Labor, land,
and capital
(Resource Market)
Costs
Firms BUY here
Households SELL here
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Income
BillyBob works for a lumber company and makes $20/hr.
The lumber company sells wood for $1,000 per crate to
a company that makes cribs. The crib company sells
cribs to Walmart for $100/crib. BillyBob just had a baby
and has to buy a crib that Walmart is selling for $150.
Using the model below, construct a circular-flow
diagram.
What do the 3 economists
have in common?
(Smith, Keynes, Marx)
They all had a similar definition of how
to promote economic stability.
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Economic Stability has 2 Concerns:
Full employment and stable prices.
Full employment: Full employment means the use
of all available resources.
 Stable Prices:
1.Keeping prices stable helps an economy
maintain a balance between consumers’ income
and suppliers’ prices.
2.Stable prices help consumers, suppliers, and
governments predict the future more accurately.

The best way to achieve full employment and stable
prices to use resources efficiently.

Efficiency (Best use of the resources available)
Simply meaning to allocate (divide) wisely and minimize costs
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What helps promote efficiency?
1.
Division of labor: -- breaks down the production
process into a series of specific tasks performed
by different workers.
 Division of labor allows for the adoption of massproduction technology.
 Ex- car wash/lawnmowing
2.
Specialization: individualized focus on one task.
 Specialized workers become more skilled over a
shorter period of time.
Dividing labor among various specialized tasks will allow
a company (or nation) to produce items with less cost.
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Which Costs are Important?
All economic/business reasoning focuses on the impact
of marginal (small) changes between decisions.
 Economic decisions will be based on marginal
(small / individual) costs and marginal (small /
individual) benefits.
 Since goods are scarce, uncertainty is a fact or
life, but we can use OPPORTUNITY COST to
help us make economic/business decisions.
“The marginal value of the best possible alternative
that is given up in the decision to use a resource.”
OPPORTUNITY COST
OPPORTUNITY COST helps us make economic
(monetary) decisions, business & personal.
“The marginal value of the best possible alternative
that is given up in the decision to use a resource.”
It is all about choices:
 Friday Night Choice A: Football Game (ticket & dinner at
concession)
 Friday Night Choice B: Movie with friends (Chick-fil-A &
popcorn)
 If you choose the football game, A, the COST of that
OPPORTUNITY is choice B, the movie. You are giving up
the movie, so that is your Opportunity Cost.
Let’s pull it all together:
Scarcity, Allocation,
Opportunity Costs & and this
thing we call the Production
Possibility Frontier (PPF)
(A simple means of measuring lost opportunities)
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Production Possibilities Frontier Model (PPF)
Shows possible combos of two types of goods that
can be made when available resources used
efficiently
 Assumptions for PPF
 Only 2 products
 Focus on one period of time (year, month,
etc)
 During that time, resources are fixed in
quantity/ quality.
 Technology does not change during the time
the model indicates.
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Production Possibilities Curve
for Susan’s Grades in English and Economics (10 Hrs of Study)
• Consider Susan, a student who only
has 10 hours of study to divide
between her economics and
English classes.
• If Susan spends most of her time
studying economics, she can earn an
A in economics . . . and a D in
her English class.
• If Susan splits her time between the
two, she can earn a B in economics
. . . and a B in her English class.
• If Susan spends most of her time
studying English, she can earn an
D in economics . . . and an A in her
English class.
• Mapping out all the possibilities of
how Susan can divide her time
(resources) between these activities
shows us her Production
Possibilities Curve (PPC).
Expected
Grade in
Economics
(y)
Production
Possibilities
Curve
A
B
C
D
F
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D
C
B
A
Expected
Grade in
English
(x)
Production Possibilities Curve
for a Nation’s Economy (Given Limited Resources)
• Consider the economy of a nation which
has limited resources to divide between
Production
Possibilities
Output
the production of clothing and food.
Only
clothing
Curve
of
• If the nation allocates all of its resources
is
produced
toward the production of clothing, then Clothing
it can produce at point S.
S
All output
• If the nation allocates all of its resources
possibilities
A
on the
toward the production of food, then it
frontier
can produce at point T.
curve are
• Mapping out all the possibilities of how
efficient
B
D
the nation can divide its resources
between these activities shows us the
nation’s Production Possibilities Curve.
• Output combinations A, B, and C are
- Inefficiency all on the PPC are therefore
C Only food
is produced
efficient allocations of resources.
• Output combination D is within the
PPC and therefore represents an
inefficient allocation of resources.
T
Output
Note that the nation could produce the
of
same level of clothing while producing
Food
a greater quantity of food at point B.
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Shifts in the PPF
Increase in available resources
CONTEMPORARY
ECONOMICS: LESSON 2.1
Decrease in available resources
40
Production Possibilities Curve
for a Nation’s Economy (Given Limited Resources)
• Consider the following PPFs.
• What can we deduct from them?
PRODUCTION POSSIBILITIES
The PPF illustrates three possibilities of
production:
1. All attainable and unattainable combinations
of production (what can and cannot be achieved)
2. Full employment and unemployment of
resources
3. Tradeoffs What we have to give up to produce
more units of a product.
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ATTAINABLE AND
UNATTAINABLE COMBINATIONS
What does the PPF show?
1. We can produce at any
point inside the PPF or on
the frontier.
2. Points outside the PPF are
unattainable. WHY?
3. Points inside the PPF are
attainable.
4. The PPF also displays full
employment of resources
if one is ON the curve.
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TRADEOFFS AND FREE LUNCH
1. When production is on the
PPF, we face a tradeoff.
To get more of one good
we must give up some of
the other good. (same as
opportunity cost)
2. When production is inside
the PPF, there is not full
utilization of resources.
We can move to the PPF
and get more goods
without giving up either
good.
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REVIEW OF P.P.F.
1.) What is the opportunity cost
of moving from Point C to
Point D?
2.) Point G is what?
3.) Anything inside
the curve is what?
Shifting the Production Possibilities
Curve Outward/Inward
1. An increase in the economy’s
resources would expand our
ability to produce goods and
services.
2. Advancements in technology can
expand the economy’s production
possibilities.
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Shifting the Production Possibilities
Curve Outward/Inward
3. An improvement in the rules (laws,
institutions, and policies) in the
economy can increase output.
4. By working harder and giving up
current leisure time, we could
increase our production of goods
and services.
5. Investment in the future.
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REVIEW OF P.P.F.
1.) What is the opportunity cost
of moving from Point C to
Point D?
Loss of 3 million CDs
2.) Point G is what?
Impossible given
current resources
3.)Profit for CDs = $5.00
Profit for water = $2.00
What is your total profit of
Point B:
14 m x $5.00 = $70 m
1 m x $2.00 = $2 m
$72 million (total profit)
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$51 million (total profit)
Questions for Thought:
1. What does a production possibilities curve demonstrate?
All the possible combinations of two goods that
can be produced with current resources.
2. What are the three major types of economies?
–
–
–
Mixed = blend of Command and Pure Capitalism
Command = government owns all the factors of production
Market = private ownership of the factors and NO
government regulation
3. Who developed the idea of the “invisible hand” and what
does it mean?
– Adam Smith: simply, an economy will maintain itself without
the need for government regulation (our greed for things will
hold the markets together)
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Questions for Thought:
4. What are the factors of production?
– C.E.L.L. (capital, entrepreneurship, land, and labor)
5. What is capital?
– the MAN-MADE goods used to produced a consumer good
6. What is labor?
– all the physical AND human resources (skill level and
education)
7. What are the reasons that will cause the PPF to shift
outward or inward?
–
–
–
–
lack of or development of technology
Increase or decrease leisure time
More resources or less resources (i.e. land, minerals, and labor)
Improvement or impairment due to government regulations.
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