Basic Economics
Dr Ed Wright
What is Economics?
• “A science that deals with the allocation, or use, of
scarce resources for the purpose of fulfilling society’s
needs and wants.” – Addison-Wesley
Scarcity
• A situation in which the amount of something
actually available would not be sufficient to satisfy
the desire for it, if it were provided free of charge.
Other Vocabulary:
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Need
Want
Economics
Goods
Services
Shortage
Factors of Production
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Land
Labor
Capital
Physical Capital
Human Capital
How is Economics used?
• Economists use the scientific method to make
generalizations and abstractions to develop theories. This
is called theoretical economics.
• These theories are then applied to fix problems or meet
economic goals. This is called policy economics
Positive vs. Normative
• Positive Statements - Based on facts. Avoids value
• Normative Statements - Includes value judgments
5 Key Economic Assumptions
1. Society’s wants are unlimited, but ALL resources are limited
(scarcity).
2. Due to scarcity, choices must be made. Every choice has a cost (a
trade-off).
3. Everyone’s goal is to make choices that maximize their satisfaction.
Everyone acts in their own “self-interest.”
4. Everyone acts rationally by comparing the marginal costs and
marginal benefits of every choice.
5. Real-life situations can be explained and analyzed through simplified
models and graphs.
Micro vs. Macro
MICROeconomics
• Study of small economic units such as
individuals, firms, and industries
(competitive markets, labor markets,
personal decision making, etc.)
MACROeconomics
• Study of the large economy as a whole
or in
• its basic subdivisions (National Economic
Growth, Government Spending,
Inflation, Unemployment, etc.)
Factors of Production
• There are 4 key factors that must
all be used to produce anything
– Natural Resources (also referred
to as “land”)
– Labor – effort of a person for
which they are paid
– Capital – human-made resources
used to create other goods
Physical Capital – Also called
Capital Goods, represents objects
that are used to produce other
goods & Human Capital –
knowledge or skills workers get
from education and experience
– Entrepreneurship – person who
takes a risk in combining the
other 3 factors to create a new
good
Making Economic Decisions
• Every decision we make involves trade-offs – alternatives that we
must give up when we make a choice
– Example – “I could stay up for 3 hours playing games, study, or sleep.”
• The most desirable of the options you pass up is called the
Opportunity Cost
Rank: sleep, studying, and playing video
games 1st, 2nd, and 3rd on a list for what
you value the most
1st Place is what you would choose to
do
2nd Place is your opportunity cost (you
give it up to do option 1
Cost/benefit
Options
Benefit
Opportunity Cost
0 hours studying, 3
hours sleeping
F on Test
None
1 hours studying, 2
hours sleeping
C on Test
1 hour of sleep
2 hours studying, 1
hour sleeping
B on Test
2 hours of sleep
3 hours studying
B+ on Test
3 hours of sleep
Implications
• There is a point at which you are paying the
same increase in cost, but seeing lower
benefits
• You must make the decision as to whether the
cost is worth it
• This same process is used by businesses and
consumers to make decisions
Production Possibilities
• Production Possibilities Graph – shows alternatives to what
an economy can produce
– The outer red line shows the maximum possible output with any
given combination
– This is the Production Possibilities Frontier (or Curve)
• To move from one point to another, the economy must
make trade-offs
• Any point along the line shows the economy operating at
maximum efficiency
• Any point below the line is underutilization – they are not
getting all that they could
• Any point above the line is presently impossible, until new
resources are available
Making sense of the curve:
• Why does the graph curve instead of making a straight
line?
– Law of Increasing Costs – as production increases for one
item, more and more resources are necessary to increase
production of the second item! The OPPORTUNITY COST
increases…
• Every resource is best suited for certain types of goods
– Farmland and cows make butter
– Metals and factories make guns and many times you hear
about butter vs. guns due to military spending on
weaponry using resources …
– To convert butter production to guns, you must sell the
cows and build new factories on the land
Practical applications
SWOT Analysis
• A SWOT analysis (alternatively SWOT matrix) is a structured
planning method used to evaluate the strengths, weaknesses,
opportunities, and threats involved in a project or in a business
venture. A SWOT analysis can be carried out for a product, place,
industry or person.
• It involves specifying the objective of the business venture or
project and identifying the internal and external factors that are
favorable and unfavorable to achieve that objective. The technique
is credited to Albert Humphrey, who led a convention at the
Stanford Research Institute (now SRI International) in the 1960s and
1970s using data from Fortune 500 companies.[1][2] The degree to
which the internal environment of the firm matches with the
external environment is expressed by the concept of strategic fit
Application of this information
Tasks:
1.i Write out a brief idea for a new piece of technology. (No matter how
stupid!) You should outline what it is, your potential market and why it is a
good idea.
1.ii Do a SWOT analysis of you idea and refine it.
1.iii Swap it with someone else and do a SWOT of theirs.
2 Do this from last week…
3 Make sure you are up to date with the coursework in for next Tuesday.
4 Start this: Write a short essay on ‘The technological and Cultural Factors
that made the Snapshot Camera a successful invention’. 400-600 words There
should be some primary research included to support arguments and the
essay should be delivered to academic standard including full Harvard
referencing. This task contributes 20% for the total mark for this module.