Key terms and basic
concepts of economics
Economics is the study of how
people make choices to satisfy
their wants
Macroeconomics
• The study of a national economy as a whole.
• Examines the aggregate behavior of the economy (i.e. how the actions of
all the individuals and firms in the economy interact to produce a
particular level of economic performance as a whole).
• Focuses on issues that affect the economy as a whole. Some of the most
common focuses of macroeconomics include unemployment rates, the
gross domestic product of an economy, and the effects of exports and
imports.
• Ex.: Overall level of prices in the economy (how high or how low they are
relative to prices last year) rather than the price of a particular good or
service.
Microeconomics
• The study of economics at an individual, group or company level.
• Focuses on how decisions are made by individuals and firms and the
consequences of those decisions
• Focuses on issues that affect individuals and companies. This could mean
studying the supply and demand for a specific product, the production that
an individual or business is capable of, or the effects of regulations on a
business.
• Ex.: How much it would cost for a university or college to offer a new
course ─ the cost of the instructor’s salary, the classroom facilities, the
class materials, and so on.
Having determined the cost, the school can then decide whether or not to
offer the course by weighing the costs and benefits.
Macroeconomics vs. Microeconomics
The next several slides looks more carefully at
the difference between microeconomic and
macroeconomic questions.
MICROECONOMIC QUESTIONS
MACROECONOMIC QUESTIONS
Go to business school or take a job?
How many people are employed in the economy
as a whole?
What determines the salary offered by Citibank
to Cherie Camajo, a new Columbia MBA?
What determines the overall salary levels paid
to workers in a given year?
What determines the cost to a university or
college of offering a new course?
What determines the overall level of prices in
the economy as a whole?
What government policies should be adopted to
make it easier for low-income students to attend
college?
What government policies should be adopted to
promote full employment and growth in the
economy as a whole?
What determines whether Citibank opens a new
office in Shanghai?
What determines the overall trade in goods,
services and financial assets between the US and
the rest of the world?
Want vs. Need
NEED
Something you have to have,
something you can't do
without. A good example is
food. If you don't eat, you
won't survive for long. Many
people have gone days
without eating, but they
eventually ate a lot of food.
You might not need a whole
lot of food, but you do need
to eat.
WANT
Something you would like to
have that is not absolutely
necessary, but it would be a
good thing to have. A good
example is music. Now,
some people might argue
that music is a need because
they think they can't do
without it. But you don't
need music to survive. You
do need to eat.
Want vs. Need Example
Your body has to have liquid to survive.
Water is a good liquid to drink because it
keeps you healthy. Milk and fruit juice are also
good because they give you vitamins and
minerals your body needs without giving you
the fat and excess sugar found in cola. Still,
cola tastes good. Drink a Pepsi or Coke or
Mountain Dew or Sprite and you feel good
because it tastes good. But you don’t need that
cola to survive.
Supply and Demand
SUPPLY
DEMAND
• How much of something is
available.
• For example, if you have 9
baseball cards, then your
supply of baseball cards is 9.
If you have 6 apples, then
your supply of apples is 6.
• How much of something
people want.
• For example, if 8 people
want baseball cards, then
the demand for baseball cards
is 8. If 6 people want apples,
then the demand for apples is
6.
Supply and Demand
• So we have supply, which is how
much of something you have,
and demand, which is how much
of something people want. Put
the two together, and you
have supply and demand.
• Supply + Demand = Price
SCARCITY and CHOICES
SCARCITY is how little of something is
available. It forces us to make CHOICES,
like how much of something to buy or how
much money to spend on something.
Scarcity is one of the most basic concepts
of economics.
SCARCITY relates
to SUPPLY and DEMAND?
SCARCITY is a measure of SUPPLY.
For example, if strawberries are scarce, then
the supply of strawberries is low. And if
many people want to buy strawberries
when none are available, then demand is
high because of a low supply caused
by scarcity.
Goods and Services
GOODS
• Goods would be
defined as anything
that anyone wants
or needs that they
can touch or hold.
• Goods are tangible
objects that satisfy
people's wants or
needs that may be
purchased such as
food, clothing, toys,
furniture, and
toothpaste.
SERVICES
• Services would be
the performance of
any duties or work
for another; helpful
or professional
activity.
• Services are
actions, such as
haircuts and car
repair, which also
satisfy people's
wants and/or
needs.
Goods, Services, and Marketing
• Economics is concerned with the
production and distribution of goods
and services.
• The distribution of goods and services is
referred to as marketing.
• The marketing of goods and services can
add almost as much to the cost as the
actual manufacturing of the goods.
• Marketing a product refers to the
advertising, and other efforts to
promote a products sale.
Different kinds of goods
• Consumer Goods are those such as food and clothing that satisfy human
wants or needs.
• Producer Goods are those such as raw materials and tools, used to make
consumer goods.
• Capital Goods are those used in the production of commodities or producer
goods such as machinery
Inflation
• Simply put, inflation is a rise in prices relative to money available. In other
words, you can get less for your money than you used to be able to get.
• Here's an example:
• You buy a candy bar for 50 cents. A year later, you go to buy the same candy
bar and it's 55 cents. You still have only 50 cents, but the price of the candy
bar has gone up. We can say that inflation is at work. The price of that bar has
been inflated.
Interdependence
• Interdependence occurs when
people and countries depend
on one another to provide each
other's economic wants.
• A relationship between two or
more people, regions, nations
or other entities in which each
is dependent on the other for
necessary goods or services.
• The most obvious example is
assembly line production. Each
person on the line depends on
others to do his or her specific
part.
Economic Interdependence
• Economic Interdependence
means that actions in one part of
the country or world have an
economic impact on what
happens elsewhere.
• The participants in an
Economic System are dependent
on others for the products they
cannot produce efficiently for
themselves.
Factors of Production
4 Factors of Production- resources that are used to make all goods and services.
1. Land (natural)- All natural resources that are used to produce goods and
services.
2. Labor (human)- Any effort a person devotes to a task for which that person
is paid.
3. Capital- Any human-made resource that is used to create other goods and
services.
a. Physical Capital- all the tools, machines, and other equipment a
business needs
b. Human Capital- the skills and knowledge of a company’s workers
4. Entrepreneur- is a person who starts and manages a business.
a. Come up with the ideas how to produce something people want to buy.
b. Organize the land, labor, capital resources needed to produce the goods
or services.
c. Take the risk of investing money in the hope of making a profit.
Additional Economic Terms to Know
• Tariff - a tax on goods produced abroad and sold domestically
• Regressive tax - a tax for which higher income tax payers pay a
smaller fraction of their income as tax than do lower income tax
payers
• Progressive tax - a tax for which higher income taxpayers pay a
larger portion of their income as tax than do lower income tax
payers
• Exports - goods produced domestically and sold abroad
• Imports - goods produced abroad and sold domestically
• Import quota - a limit on the quantity of a good that can be
produced abroad and sold domestically
Additional Economic Terms to Know
• Cost - the value of everything a seller must give up to produce a
good
• Shortages- occur when producers will not or cannot offer goods
or services at current prices (not the same as scarcity)
• Surplus - a situation in which quantity supplied is greater than
quantity demanded
• Profit - total revenue minus total cost
• Monopoly - a firm that is the sole seller of a product without
close substitutes
• Property rights - the ability of an individual to own and exercise
control over scarce resources