Lecture 1
Chapter 1: What Economics is
about; Appendix A
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 Goods
and Bads
 Factors of Production
 Scarcity
 Opportunity Cost
 Marginal Analyses
 Efficiency
 Exchange and Trade
 Economic categories
 Two-variable diagrams
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 Goods:
Anything that gives a person utility of
satisfaction, which can be tangible (a book,
food) or intangible (friendship, love)
 Bads:
Something that gives a persons
disutility (dissatisfaction), such as being ill,
pollution
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Factors of production/inputs are the resources
used in the production process in order to
produce outputs.
 There are four categories of factors of
production:
1. Land/Natural resources: minerals, water, oil,
forests, animals
2. Labor: It is the physical and mental
contributions made by workers towards the
production process. There are two types of
labor – skilled (educated, white-collared
workers) and unskilled (uneducated/poorly
educated, blue-collared workers)

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3. Capital: consists of produced goods that can
be used as inputs for further production, e.g.
machinery, equipment, tools.
4. Entrepreneur: Some people who have the
skills to combine the three factors of
production – land, labor and capital – to
produce final goods.
Payments made to factors of production:
 Land – rent
 Labor – wages
 Capital – interest
 Entrepreneur – profit
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 Scarcity
is a condition in which our wants
(for goods) are greater than the limited
resources (land, labor, capital and
entrepreneurship) available to satisfy those
wants. It is the fundamental economic
problem of having seemingly unlimited wants
in a world of limited resources. Hence,
scarcity involves making a sacrifice, i.e.
giving something up in order to obtain more
of what is wanted.
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 Choices:
People have to make choices
because of scarcity. Since there are limited
resources and unlimited wants, some of our
desires must go unfulfilled. E.g. should I go
shopping or should I go to the movies?
 Need for a rationing device: Determines
who gets what: If people have infinite wants
for limited resources to produce goods, then
a rationing device must be used to decide
who gets from the available quantity of
goods, e.g. money – the more you pay, the
more you get.
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 Competition:
If there were enough resources
in the world to fulfill all demands, i.e. no
scarcity, then there would be no
competition.
People also compete to get more of the
rationing device
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 Opportunity
cost of a choice is the value of
the best alternative forgone, in a situation
where a choice needs to be made between
several separate options, due to limited
resources.
 It is the “cost” incurred of not enjoying the
benefit you would have gained from the
alternative option you have forfeited.
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 After
you graduate, you have decided to
accept a position working at the Bureau of
Labor Statistics for TK. 33,000/month. The
other offers you received were TK.
22,000/month, TK. 28000/month and TK.
19000/month. What is the opportunity cost
of accepting the position at the Bureau of
Labor Statistics?
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Opportunity cost relating to behavior:
From the book:
Scenario 1: Student has a job offer of $8/hr.
Opportunity cost of attending class is value ,
forgone from taking the job, $8/hr
Scenario 2: Receives another job offer of
$70/hr. Opportunity cost of attending class is
value forgone from taking the new job,
$70/hr
The higher the opportunity cost of doing
something, the less likely it will be done.
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 Economists
evaluate decisions through a
cost-benefit analysis. The cost-benefit
principle says that you should take an action
if and only if, the extra benefit from taking
the action is greater than the extra cost.
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 Definition
of margin in economics: additional
 Marginal benefit (MB) is the benefit from
each additional increment or unit
 Marginal cost (MC) is the cost from each
additional increment or unit
 If MB > MC, then you consume the additional
unit.
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In a hot summer day, the first glass of icecold lemonade quenched your thirst, but the
second glass may not be as strongly effective
as the first glass.
additional benefits of an additional glass of
lemonade
versus
additional costs of an additional glass of
lemonade
Class exercise: Chicken burger lunch; study
time
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 We
usually think in marginal terms rather
than total terms because the benefits and
costs of an additional unit are independent
from the benefits you have gained and costs
you have incurred from consuming the
previous units.
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 Consume
till the marginal benefit from
consuming the additional unit is equal to the
marginal cost from consuming the additional
unit – this is known as the optimal or
efficient amount.
Number of burgers
Marginal Benefit
(hunger satisfaction)
Marginal Cost (health
risks)
1
10
2
2
8
4
3
6
6
4
4
8
5
2
10
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 Exchange
or trade is process of giving up one
thing for something else. It is the economic
behavior that involves exchanging one scarce
resource for another.
 Exchange or trade only occurs when each
person gives up something he or she values
less for something he or she values more.
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 Positive
economics: Objective and fact
based – attempts to determine what is. You
must be able to test, prove or disprove
positive statements. E.g. government
provided healthcare increases public
expenditures
 Normative economics: subjective and value
based – addresses what should be. Since
normative statements are opinion based,
they cannot be proved or disproved. E.g.
government should provide basic healthcare
to all citizens.
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 Independent
Relationships
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