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2012 Pearson Addison-Wesley
What is Economics
Definition of Economics
Our inability to get everything we want is called scarcity;
Because we cannot get everything we want, we must make
choices;
Economics is the social science that studies the choices that
individuals, businesses, governments, and entire societies make
under scarcity.
In other words, economics is the study of how people choose to
use their limited resources in an attempt to satisfy their unlimited
wants.
Do entire societies also face scarcity?
Yes, because we are living in a world of limited resources.
2012 Pearson Addison-Wesley
Jacob Viner: Economics is what economists do.
Jim Duesenberry: Economics is all about how people
make choices. Sociology is about why there isnt any
choice to be made.
2012 Pearson Addison-Wesley
Definition of Economics
Economics divides in to main parts:
Microeconomics
Macroeconomics
Microeconomics is the study of choices that individuals
and businesses make, the way those choices interact in
markets, and the influence of governments.
Macroeconomics is the study of the performance of the
national and global economies.
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THE ECONOMIC PROBLEM
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Production Possibilities and Opportunity
Cost: Economic model
An economic model is a simplified description of a set
of variables and the relationships between them.
The production possibilities frontier (PPF) is the boundary
between those combinations of goods and services that can be
produced and those that cannot.
Suppose each day across the US, we can produce at most a
combination of 4 millions of Pizzas and 5 millions of cans of Cola;
Can we produce 6 millions of Pizzas and 10 millions of cans of
Cola?
Is 2 millions of Pizzas and 5 millions of cans of Cola possible?
What about 3 millions of Pizzas and 8 millions of cans of Cola?
2012 Pearson Addison-Wesley
Production Possibilities and Opportunity
Cost: Economic Graph
In order to make models tractable, we make simplifying
assumptions.
To illustrate the PPF, we focus on two goods at a time and
hold the quantities of all other goods and services constant.
In this case, we only change the production of Cola and
Pizza; the production of everything else remain constant.
That is, we look at a model economy in which everything
remains the same except the two goods were considering.
2012 Pearson Addison-Wesley
Production Possibilities and Opportunity Cost
We use graphs to show general relationships among the
variables in an economic model.
Figure 2.1 shows the PPF for two goods: cola and pizzas.
2012 Pearson Addison-Wesley
Production Possibilities and Opportunity Cost
Any point on the frontier such as E and any point inside the
PPF such as Z are attainable.
Points outside the PPF are unattainable.
Can we produce 3 millions of
Pizzas and 8 millions of cans of
Cola?
2012 Pearson Addison-Wesley
1) The production possibilities frontier is the boundary between
A) those combinations of goods and services that can be
produced and those that can be consumed.
B) those resources that are limited and those that are unlimited.
C) those combinations of goods and services that can be
produced and those that cannot.
D) those wants that are limited and those that are unlimited.
2012 Pearson Addison-Wesley
