Chapter 1 for Eco1102

Chapter 1

What is economics?

¥ Economics is the study of how people manage resources.

¥ Decisions made by individuals and also by groups.

¥ Resources are both physical objects and intangibles such as time.

¥ Economics is divided into two broad fields:

¥ Microeconomics: Study of individuals and firms.

¥ Macroeconomics: Study of the economy on a regional, national, or international scale.

Groups include families, firms, governments, and other organizations. Resources include cash and gold mines, time, ideas, technology, job experience, and even personal relationships. Microeconomics and macroeconomics are highly related and interdependent; we need both to fully understand how economies work.

Choices and rational behavior

¥ Economists assume that people:

Ð Compare all available choices.

Ð Purposefully behave in the way that will best achieve their goals, called rational behavior.

¥ Peoples’ decisions can be studied using four main questions:

1. What are their wants and constraints?

2. What are their trade-offs?

3. How will others respond?

4. Why isn’t everyone doing it?

Rational behavior helps to explain a lot about the world from shoe shopping to baseball, from running a hospital to running for political office.

Question 1: This relates to scarcity.

Question 2: This relates to opportunity cost.

Question 3: This relates to incentives.

Question 4: This relates to efficiency.

Scarcity

¥ People make decisions aimed at getting the things they want.

¥ People want a lot of things, but they are constrained by limited resources.

¥ Scarcity is the condition of peoples’ wants being greater than available resources.

Ð Individuals’ resources: time and money.

Ð Societies’ resources: factors of production, such as labour and technology.

Scarcity is a fact of life. There is no way of getting around it in a finite world. People can arrange their resources in a