INTRODUCTION TO 2.

Rising income
3. Advertising
ECONOMICS
4. Scientific research
5. Urbanization
Economics comes from the Greek word
“oikonomia,” which means management of a
How to solve the problem of scarcity?
household. It is also a social science that studies the
System is an orderly grouping of interdependent
optimum allocation of limited human and non-
components linked together according to a plan to
human resources among their alternative uses in order
achieve a scientific objectives. Example: family,
to satisfy the unlimited needs and wants of people.
school, church, community, workplace, political, etc.
Economics is the study of how people, institutions,
Economic Systems describes how a country’s
and society make economic choices under conditions
economy is organized: solution to the economic
of scarcity.
problem of scarcity. Because of the problem of
4 Major Functions of Management: planning,
scarcity, every country needs a system to determine
leading, organizing, and controlling.
how to use its productive resources. Scarcity is not
having enough of something. An economic system
Microeconomics (MicroE)
must answer 5 questions.
Major problem of economics: Scarcity means
1. What to produce? (What kinds of goods and
that society has limited resources and therefore
services should be produced?)
cannot produce all the goods and services people
2. How much to produce? (In what quantities
wish to have. The management of society’s resources
should the goods and services be produced?)
is important because resources are scarce.
3. How to produce? (What productive resources
What choices do we make everyday? What
are used to produce goods and services? In
major/important choices have we made in our lifetime? What
what combination?)
choices will we be making in the future?
4. For whom to produce? (Who gets to have
the goods and services?)
Economic Resources/Factors of Production:
5. How can production grow? (Production
1. Natural Resources – land, sea, air
should increase every year.)
2. Human Resources – labor force
3. Capital Resources – machines, tools,
3 Types of Economic Systems:
equipment, infrastructure (airport, irrigation
1. Traditional Economy
systems, etc.)
2. Command Economy
4. Entrepreneur
3. Market Economy
5. Dollars
4. *Most countries are…Mixed Economies!
(Maarket + Command)
Economic Needs and Wants
Traditional Economy (Subsistence Economy)
Maslow’s Hierarchy of Needs:
An economic system in which economic
Level 1: Physiological Needs
decisions are based on habits, customs, traditions,
Level 2: Safety/Security Needs
beliefs, practices. People will make what they always
Level 3: Social Needs/Belongingness
made & will do the same work their parents did.
Level 4: Self Esteem/Ego
Exchange of goods is done through bartering—
Level 5: Self Actualization
trading without using money.
Who decides what to produce? People follow
Factors that create additional wants:
their customs and make what their ancestors made.
1. Population growth
 Who decides how to produce goods & services? Who are the goods and services produced for?
People grow & make things the same way that their Consumers.
ancestors did. There are no truly pure market economies, but
Who are the goods & services produced for? the United States is close. In a truly free market
People in the village who need them. economy, the government would not be involved at
Examples: villages in Africa and South America, all. There would be no laws to protect workers from
the cultural minorities, the indigenous tribes in the unfair bosses. There would be no rules to make sure
Cordilleras, the Aborigines in Australia. that credit cards were properly protected.
Many societies have chosen to have some rules to
Command Economy (Planned Economy) protect consumers, workers, and businesses (mixed).
Government makes all economic decisions & These rules reduce the freedoms that businesses have,
owns most of the property. Governmental planning but they also protect the workers and consumers.
groups determine such things as the prices of
goods/services & the wages of workers. This system Mixed Economy
has not been very successful & more and more Market + command = mixed.
countries are abandoning it. There are no pure command or market
Who decides what to produce? Government economies. To some degree, all modern economies
makes all economic decisions. exhibit characteristics of both systems and are often
Who decides how to produce goods and services? referred to as mixed economies. Most economies are
Government decides how to make goods/services. closer to one type of economic system than another.
Who are the goods and services produced for? Businesses own most resources and determine
Whoever the government decides to give them to. what and how to produce, but the government
Countries with communist governments have regulates certain industries.
command economies. Examples: There are no truly Who decides what to produce? Businesses.
pure command economic systems, but close countries Who decides how to produce goods and services?
are: North Korea, former Soviet Union, Cuba. Businesses, but the government regulates certain
Germany and Russia have moved away from having a industries.
command economy since 1991. Now they have a Who are the goods and services produced for?
mixed economy. Consumers.
Most democratic countries fall in this category
Market Economy (Free Enterprise Economy) (there are no truly pure market or command
An economic system in which production and economies). Examples: Brazil, Mexico, Canada, UK,
distribution questions are answered by prices and US, Germany, Russia, Australia, etc.
profits (supply and demand). Most of the resources
are owned by private citizens. Which economic system is best?
Economic decisions are based on free enterprise Market system has proven to be best because it
(competition between companies). Important promotes the goals of growth, freedom, & efficiency.
economic questions are not answered by govt. but by Citizens are free to own their own property and use it
individuals. Govt. does not tell a business what goods in the most efficient and profitable way.
to produce or what price to charge. Command and traditional systems sometimes
Who decides what to produce? Businesses base offer more security, but are not nearly as strong in
decisions on supply and demand and free enterprise efficiency, growth, freedom, and environmental
(price). quality.
Who decides how to produce goods and services?
Businesses decide how to produce goods.
 2 BRANCHES OF ECONOMICS Focuses on the problems of low-income
countries. What can be done to promote development
1. Microeconomics in these nations? Important concerns of development
‘Micro’ means small. It is the part of economics for economists include population growth and
concerned with individual decision-making units, such control, provision for basic needs, and strategies for
as a consumer, a worker, or a business firm. We international trade.
measure the price of a specific product, the number
of workers employed by a single firm, the revenue or • Economic history
income of a particular firm or household, or the Traces the development of the modern economy.
expenditures of a specific firm, government entity, or What economic and political events and scientific
family. advances caused the Industrial Revolution? What
Microeconomics looks at the individual unit—the explains the tremendous growth and progress of
household, the firm, the industry. It sees and post-World War II Japan? What caused the Great
examines the “trees.” Depression of the 1930s?

2. Macroeconomics • Environmental economics

‘Macro’ means large. It deals with the behavior of Studies the potential failure of the market system
the large aggregates in the economy. The large to account fully for the impacts of production and
aggregates are total saving, total consumption, total consumption on the environment and on natural
income, total employment, general price level, wage resource depletion. Have alternative public policies
level, cost structure, etc. and new economic institutions been effective in
Macroeconomics looks at the whole, the correcting these potential failures?
aggregate. It sees and analyzes the “forest.”
• Finance
The Diverse Fields of Economics Examines the ways in which households and
• Behavioral economics firms actually pay for, or finance, their purchases. It
Uses psychological theories relating to emotions involves the study of capital markets (including the
and social context to help understand economic stock and bond markets), futures and options, capital
decision making and policy. Much of the work in budgeting, and asset valuation.
behavioral economics focuses on the biases that
individuals have that affect the decisions they make. • Health economics
Analyzes the health care system and its players:
• Comparative economic systems government, insurers, health care providers and
Examines the way alternative economic systems patients. It provides insight into the demand for
function. What are the advantages and disadvantages medical care, health insurance markets, cost-
of different systems? controlling insurance plans (HMOs, PPOs, IPAs),
government health care programs (Medicare and
• Econometrics Medicaid), variations in medical practice, medical
Applies statistical techniques and data to malpractice, competition versus regulation, and
economic problems in an effort to test hypotheses national health care reform.
and theories. Most schools require economic majors
to take at least one course in statistics or • The history of economic thought
econometrics. Which is grounded in philosophy, studies the
development of economic ideas and theories over
• Economic development time, from Adam Smith in the eighteenth century to
the works of economists such as Thomas Malthus, action. Example: When a student considers whether
Karl Marx, and John Maynard Keynes. Because to go to college for an additional year, he compares
economic theory is constantly developing and the fees & foregone wages to the extra income he
changing, studying the history of ideas helps give could earn with the extra year of education.
meaning to modern theory and puts it in perspective.
• Principle #4: People respond to incentives.
Incentive is something that induces a person to act,
THE 10 PRINCIPLES i.e. the prospect of a reward or punishment. Rational
people respond to incentives. Marginal changes in
costs or benefits motivate people to respond. The
How people make decisions:
decision to choose one alternative over another
• Principle #1: People face tradeoffs.
occurs when the alternative’s marginal benefits exceed
To get one thing, we usually have to give up
its marginal costs!
another thing. All decisions involve tradeoffs.
Example: Having more money to buy stuff requires
How people interact:
working longer hours, which leaves less time for
• Principle #5: Trade can make everyone better
leisure.
off.
Society faces an important tradeoff: efficiency vs.
Rather than being self-sufficient, people can
equality. Efficiency is when society gets the most
specialize in producing one good or service and
from its scarce resources. Equality is when prosperity
exchange it for other goods. Trade allows people to
is distributed uniformly among society’s members.
specialize in what they do best. Countries also benefit
Tradeoff is to achieve greater equality, could
from trade and specialization: Get a better price
redistribute income from wealthy to poor. But this
abroad for goods they produced. Buy other goods
reduces incentive to work and produce, shrinks the
more cheaply from abroad than could be produced at
size of the economic “pie.”
home.

• Principle #2: The cost of something is what

• Principle #6: Markets are usually a good way
you give up to get it.
to organize economic activity.
Making decisions requires comparing the costs
A market economy is an economy that allocates
and benefits of alternative choices. The opportunity cost
resources through the decentralized decisions of
of an item is what you give up to obtain that item.
many firms and households as they interact in
The opportunity cost is the relevant cost for decision-
markets for goods and services. Market is a group of
making. Example: The opportunity cost of seeing a
buyers and sellers (need not be in a single location).
movie is not just the price of the ticket, but the value
“Organize economic activity” means determining
of the time you spend in the theater. There is no such
what goods to produce, how to produce them, how
thing as a free lunch.
much of each to produce, and who gets them.
Households decide what to buy and who to work for.
• Principle #3: Rational people think at the
Firms decide who to hire and what to produce.
margin.
Rational people systematically and purposefully
• Principle #7: Governments can sometimes
do the best they can to achieve their objectives.
improve market outcomes.
Rational people make decisions by evaluating costs
Market failure occurs when the market fails to
and benefits of marginal changes, incremental
allocate resources efficiently. Causes of market failure:
adjustments to an existing plan. Marginal changes are
Externalities, when the production or consumption of
small, incremental adjustments to an existing plan of
a good affect bystanders (e.g. pollution). Market power,
a single buyer or seller has substantial influence on
market price (e.g. monopoly). When the market fails
(breaks down) government can intervene to promote
efficiency and equity.

How the economy as a whole works:

• Principle #8: The standard of living depends
on a country’s production.
Standard of living may be measured in different
ways: by comparing personal incomes and by
comparing the total market value of a nation’s
production.
Gross National Product (GNP)
Gross Domestic Product (GDP)
Gross National Income (GNI)
Net National Income (NNI)

• Principle #9: Prices rise when the

government prints too much money.
Inflation is an increase in the overall level of
prices in the economy. One cause of inflation is the
growth in the quantity of money. When the
government creates large quantities of money, the
value of the money falls.

• Principle #10: Society faces a short-run

tradeoff between inflation and
unemployment.
Short-run: 1 – 2 years. Many economic policies
push inflation and unemployment in opposite
directions. The Phillips Curve illustrates the tradeoff
between inflation and unemployment.

Inflation Unemployment