Instructor: Dr. Patrick Zhicheng Liang
Introduction
1. Definition of Economics
Economics is the social science that studies the choices that individuals,
businesses, governments, and entire societies make as they cope with scarcity
and the incentives that influence and reconcile those choices.
1.1 Scarcity
➢ Unlimited human wants and needs in a world of limited resources.
➢ Society has insufficient productive resources to fulfill all human wants
and needs.
➢ Economics is the study of how people choose to use their limited
resources in attempts to satisfy their unlimited wants and needs.
Because we face scarcity, WE MUST MAKE CHOICES!
➢ These decisions involve picking one thing over all the other possibilities
– a Trade-Off.
➢ A trade-off means a sacrifice - giving up one good or activity in order to
obtain some other good or activity.
Every Choice Has a Cost:
The cost of any choice is the value of the best opportunity that is forgone in
making it.
1.2 Opportunity cost
--Opportunity cost is the evaluation of a trade-off.
--Opportunity cost: the value of the highest-valued alternative that must be
forgone when a choice is made.
Instructor: Dr. Patrick Zhicheng Liang
Factors of Production
(1) Factors of Production are grouped into four categories:
 Natural Resources (e.g., Land, Oil, Wood, etc.)
✓ Nature Resources include the “gifts of nature” (or resources not
created by human efforts)—such as raw materials, land, minerals,
forests, water, and climate—used in the productive process.

Labor
✓ Labor includes people with all their efforts and abilities (that is,
all physical and mental efforts that people make available for
production).

Capital
✓ Capital, or investment goods, includes the tools, machinery,
equipment, computers, computer software, buildings, and
factories used in production.

Entrepreneurship
✓ Entrepreneurship refers to the human resource that organizes and
manages natural resources, labor, and capital to produce goods
and services. Entrepreneurs are individuals who bring a product
to market or seek profit by undertaking risky activities such as
starting a new business, creating a new product, or inventing a
new way of accomplishing something.
(2) Income for different factors of production:
✓ Land earns rent.
✓ Labor earns wages.
✓ Capital earns interest.
✓ Entrepreneurship earns profit.
1.2 Incentives
➢ An incentive is a reward that encourages an action or a penalty that
discourages an action.
2. Microeconomics vs. Macroeconomics
Economics divides in two main parts: Microeconomics & Macroeconomics
2.1 Microeconomics
✓ Microeconomics focuses on the individual parts of the economy.
✓ Microeconomics studies the economy at the level of individual
consumers, workers, firms, goods, and markets
For examples: Microeconomics studies
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Buying decisions of the individuals
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Consumers’ satisfaction
▪
Buying and selling decisions of the firm
▪
The determination of prices in individual markets
▪
The quantity, quality and variety of products
Instructor: Zhicheng Liang
2.2 Macroeconomics
✓ Macroeconomics looks at the economy as a whole.
✓ Macroeconomics studies the economy at the aggregate level, at the level
of the economy as a whole.
✓ Macroeconomics studies the performance of the national and global
economies
For examples: Macroeconomics studies economy-wide phenomena
▪
▪
▪
▪
▪
Economic growth
Unemployment and inflation
Aggregate demand and aggregate supply
Economic policies--fiscal and monetary policies
International trade--exports and imports
Exercises
1. Which of the following is a Microeconomic question? (
)
A. How many people are employed in the economy as a whole this year?
B. What determines the overall salary levels paid to workers in the economy in a
given year?
C. What determines whether Bank of America opens a new Branch in Paris?
D. What determines the overall level of prices in the economy as a whole?
2. Which of the following is a Macroeconomic question? (
)
A. Should I go to business school or take a job right now?
B. What determines the salary offered by Coca-Cola Corporation to Willy Nelson,
a new MBA?
C. What determines the cost to a university or college of offering a new course?
D. What determines the overall trade in goods, services, and financial assets
between the Philippines and the rest of the world.