Economics 1
Economics 1
Economics 1
Opportunity cost
Central to economics is the idea of opportunity cost: the value of the good, service, or time forgone to
obtain something else / the value of the best thing we give up to get something.
E.g. We have bought an apple for one dollar. Now we cannot buy an orange for the same dollar. The
orange was the opportunity cost of that apple.
E.g. Fast food line: Economists believe that what is true for the behavior of customers at fast-food
restaurants is true for economic behavior in general. Faced with an array of choices, consumers, workers,
and businesses rationally compare marginal (extra) costs and marginal benefits in making decisions.
2) Macroeconomics
- Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates, such
as the government, household, and business sectors.
- Macroeconomics is the study of the behavior of economic aggregates, such as GDP which tries to
measure the value of stuff produced, inflation which is a measure how prices go up over time and
unemployment which measures how many people are not employed.
- Figuratively, macroeconomics looks at the beach, not the pieces of sand, the rocks, and the shells.
The micro–macro distinction does not mean that economics is so highly compartmentalized that every topic
can be readily labeled as either micro or macro; many topics and subdivisions of economics are rooted in
both.
Example: While the problem of unemployment is usually treated as a macroeconomic topic (because
unemployment relates to aggregate production), economists recognize that the decisions made by
individual workers on how long to search for jobs and the way specific labor markets encourage or impede
hiring are also critical in determining the unemployment rate.
Positive and Normative Economics
All economic questions fall into one of two categories:
Positive Normative
Positive economics analysis deals with facts. Normative economics reflects value judgments.
What is? What ought to be?
Why do people use money? Should people use money?
No value judgments Value judgments
Both microeconomics and macroeconomics contain elements of positive economics and normative
economics.
Positive economics focuses on facts and cause-and-effect relationships. It includes description, theory
development, and theory testing (theoretical economics).
Positive economics avoids value judgments, tries to establish scientific statements about economic
behavior, and deals with what the economy is actually like. Such scientific-based analysis is critical to good
policy analysis.
Economic policy, on the other hand, involves normative economics, which incorporates value judgments
about what the economy should be like or what particular policy actions should be recommended to
achieve a desirable goal (policy economics). Normative economics looks at the desirability of certain
aspects of the economy. It underlies expressions of support for particular economic policies.
Positive economics concerns what is, whereas normative economics embodies subjective feelings
about what ought to be.
Examples:
Positive statement: “The unemployment rate in France is higher than that in the United States.”
Normative statement: “France ought to undertake policies to make its labor market more flexible to reduce
unemployment rates.” Whenever words such as “ought” or “should” appear in a sentence, you are very
likely encountering a normative statement.
Most of the disagreement among economists involves normative, value-based policy questions. Of course,
economists sometime disagree about which theories or models best represent the economy and its parts,
but they agree on a full range of economic principles. Most economic controversy thus reflects differing
opinions or value judgments about what society should be like.
Individuals’ Economizing Problem
Individuals face an economizing problem. Because their wants exceed their incomes, they must decide
what to purchase and what to forgo.
Limited income - We all have a finite amount of income, even the wealthiest among us. Our income comes
to us in the form of wages, interest, rent, and profit, although we may also receive money from government
programs or family members. The average income of Americans in 2006 was $44,970. In the poorest
nations, it was less than $500.
Unlimited wants - Our wants extend over a wide range of products, from necessities (for example, food,
shelter, and clothing) to luxuries (for example, perfumes, yachts, and sports cars).
A budget line (budget constraint) shows the various combinations of two goods that a consumer can
purchase with a specific money income.
-Attainable and Unattainable Combinations
-Trade-Offs and Opportunity Costs
-Choice
-Income changes
Scarce resources
Resource categories
Graphically, a budget line (or budget constraint) illustrates the economizing problem for individuals. The line
shows the various combinations of two products that a consumer can purchase with a specific money
income, given the prices of the two products.
Resource Categories
Economists classify economic resources into four general categories.
1) Land - Land means much more to the economist than it does to most people. To the economist land
includes all natural resources (“gifts of nature”) used in the production process, such as arable land,
forests, mineral and oil deposits, and water resources.
2) Labor - The resource labor consists of the physical and mental talents of individuals used in producing
goods and services. The services of a logger, retail clerk, machinist, teacher, professional football player,
and nuclear physicist all fall under the general heading “labor.”
3) Capital - For economists, capital (or capital goods) includes all manufactured aids used in producing
consumer goods and services. Included are all factory, storage, transportation, and distribution facilities, as
well as tools and machinery.
Economists refer to the purchase of capital goods as investment.
Capital goods differ from consumer goods because consumer goods satisfy wants directly, whereas capital
goods do so indirectly by aiding the production of consumer goods. Note that the term “capital” as used by
economists refers not to money but to tools, machinery, and other productive equipment. Because money
produces nothing, economists do not include it as an economic resource. Money (or money capital or
financial capital) is simply a means for purchasing capital goods.
4) Entrepreneurial Ability - Finally, there is the special human resource, distinct from labor, called
entrepreneurial ability. The entrepreneur performs several functions:
The entrepreneur takes the initiative in combining the resources of land, labor, and capital to produce a
good or a service. Both a sparkplug and a catalyst, the entrepreneur is the driving force behind production
and the agent who combines the other resources in what is hoped will be a successful business venture.
The entrepreneur makes the strategic business decisions that set the course of an enterprise.
The entrepreneur is an innovator. He or she commercializes new products, new production techniques, or
even new forms of business organization.
The entrepreneur is a risk bearer. The entrepreneur has no guarantee of profit. The reward for the
entrepreneur’s time, efforts, and abilities may be profits or losses. The entrepreneur risks not only his or her
invested funds but those of associates and stockholders as well.
Because land, labor, capital, and entrepreneurial ability are combined to produce goods and services, they
are called the factors of production, or simply “inputs.”
Generalization: At any point in time, a fully employed economy must sacrifice some of one good to obtain
more of another good.
Scarce resources prohibit such an economy from having more of both goods.
Society must choose among alternatives.
There is no such thing as a free pizza, or a free industrial robot. Having more of one thing means having
less of something else.
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