Central Concepts of Economics
Why study economics?
All your life – from cradle to grave and beyond – you will run up against the brutal truths of
economics.
Without studying economics, you cannot be fully informed about international trade, tax
policy, or the causes of recessions and high unemployment.
Your future depends not only on your own abilities but also on how national and regional
economic forces affect your wages. Also, your knowledge of economics can help you make
wise decisions about how to buy a home, pay for your children’s education, and set aside a
nest egg for retirement.
1 Scarcity and efficiency: The twin themes of
economics
1.1 Definitions of Economics
Economics
The study of how societies use scarce (knapp) resources to produce valuable goods and
services and distribute them among different individuals.
Some of the major subjects:
Economics explores the behavior of the financial markets, including interest rates,
exchange rates, and stock prices
The subject examines the reason why some people or countries have high incomes
while others are poor; it goes on to analyze ways that poverty can be reduced without
harming the economy
It studies business cycles – the fluctuations (Schwankung) in the credit,
unemployment, and inflation – along with policies to moderate them
Economics studies international trade and finance and the impacts of globalization,
and it particularly examines the thorny (heikel) issues involved in opening up borders
for free trade
It asks how government policies can be used to pursue important goals such as rapid
economic growth, efficient use of resources, full employment, price stability, and a fair
distribution of income
A person who practices economics is an economist
Is a branch of all sciences
Economy
It is the physical world of distribution and creation of goods. Companies are part of the
economy.
,1.2 Scarcity and Efficiency
Goods are scarce and society must use its resources efficiently.
Indeed, the concerns of economics will not go away because of the fact of scarcity and the
desire for efficiency.
Scarcity
The distinguishing characteristic of an economic good. That an economic good is scarce
means not that it is rare but only that it is not freely available for the taking. To obtain such a
good, one must either produce it or offer other economic goods in exchange.
Goods are limited relative to desires
Even after centuries of rapid economic growth, production is not high enough to meet
everyone’s desires.
There are not enough goods and services to satisfy even a small fraction of everyone’s
consumption desires
Most scarce is the short-time memory of our brain since there is not space for all
information we encounter every day
Justification of having economics economic problem
Because of this problem we need a guidance for how to make decisions and set priorities
A day has only 24 hours
A world without scarcity would mean that infinitive quantities of every good could be
produced or that human desires were fully satisfied.
= Eden of affluence
Free goods
Those goods that are not economic goods. Like air or seawater, they exist in such large
quantities that they need not be rationed out among those wishing to use them.
Consequences:
All goods would be free
All prices would be zero, and markets would be unnecessary
Economics would no longer be a useful subject
People would not worry about stretching out their limited incomes because they could
have everything, they wanted
Businesses would not need to fret over the cost of labor or health care
Governmentus would not need to struggle over taxes or spending or pollution because
nobody would care
No one would be concerned about the distribution of incomes among different people or
classes
There is no society who has this utopia of limitless possibilities. Our world is one of scarcity,
full of economic goods.
Economic good
A good that is scarce relative to the total amount of it that is desired. It must therefore be
rationed, usually by charging a positive price.
, Scarcity, law of
The principle that most things that people want are available only in limited supply (the
exception being free goods). Thus, goods are generally scarce and must somehow be
rationed, whether by price or some other means.
Given unlimited wants, it is important that an economy make the best use of its limited
resources Efficiency
Efficiency
Absence of waste, or the use of economic resources that produces the maximum level of
satisfaction possible with the given inputs and technology.
Denotes the most effective use of society’s resources in satisfying people’s wants and
needs.
In an economy with unchecked monopolies or unhealthy pollution or government
corruption
o it may produce less than would be possible without these factors
o it may produce a distorted bundle of goods that leaves consumers worse off than
the other could be.
Inefficient allocation of resource
Economic efficiency
Requires that an economy produces the highest combination of quantity and quality of
goods and services given its technology and scarce resources. An economy is producing
efficiently when no individual’s economic welfare can be improved unless someone else is
made worse off.
The essence of economics is to acknowledge the reality of scarcity and figure out how to
organize society in a way which produces the most efficient use of resources.
1.3 Uncertainty
Because of the economic problem wee need a guidance for how to make decisions and set
priorities.
What happens when you lose your job, consequences of climate change, change of
price/stock market
1.4 Microeconomics and Macroeconomics
Economics is divided into the two major subfields microeconomics and macroeconomics.
Microeconomics
Analysis dealing with the behavior of individual elements in an economy—such as the
determination of the price of a single product or the behavior of a single consumer or
business firm.
Founder: Adam Smith (1776)
o Identified the remarkable efficiency properties of markets and how the self-interest
of individuals working through the competitive market can produce a societal
economic benefit
Why study economics?
All your life – from cradle to grave and beyond – you will run up against the brutal truths of
economics.
Without studying economics, you cannot be fully informed about international trade, tax
policy, or the causes of recessions and high unemployment.
Your future depends not only on your own abilities but also on how national and regional
economic forces affect your wages. Also, your knowledge of economics can help you make
wise decisions about how to buy a home, pay for your children’s education, and set aside a
nest egg for retirement.
1 Scarcity and efficiency: The twin themes of
economics
1.1 Definitions of Economics
Economics
The study of how societies use scarce (knapp) resources to produce valuable goods and
services and distribute them among different individuals.
Some of the major subjects:
Economics explores the behavior of the financial markets, including interest rates,
exchange rates, and stock prices
The subject examines the reason why some people or countries have high incomes
while others are poor; it goes on to analyze ways that poverty can be reduced without
harming the economy
It studies business cycles – the fluctuations (Schwankung) in the credit,
unemployment, and inflation – along with policies to moderate them
Economics studies international trade and finance and the impacts of globalization,
and it particularly examines the thorny (heikel) issues involved in opening up borders
for free trade
It asks how government policies can be used to pursue important goals such as rapid
economic growth, efficient use of resources, full employment, price stability, and a fair
distribution of income
A person who practices economics is an economist
Is a branch of all sciences
Economy
It is the physical world of distribution and creation of goods. Companies are part of the
economy.
,1.2 Scarcity and Efficiency
Goods are scarce and society must use its resources efficiently.
Indeed, the concerns of economics will not go away because of the fact of scarcity and the
desire for efficiency.
Scarcity
The distinguishing characteristic of an economic good. That an economic good is scarce
means not that it is rare but only that it is not freely available for the taking. To obtain such a
good, one must either produce it or offer other economic goods in exchange.
Goods are limited relative to desires
Even after centuries of rapid economic growth, production is not high enough to meet
everyone’s desires.
There are not enough goods and services to satisfy even a small fraction of everyone’s
consumption desires
Most scarce is the short-time memory of our brain since there is not space for all
information we encounter every day
Justification of having economics economic problem
Because of this problem we need a guidance for how to make decisions and set priorities
A day has only 24 hours
A world without scarcity would mean that infinitive quantities of every good could be
produced or that human desires were fully satisfied.
= Eden of affluence
Free goods
Those goods that are not economic goods. Like air or seawater, they exist in such large
quantities that they need not be rationed out among those wishing to use them.
Consequences:
All goods would be free
All prices would be zero, and markets would be unnecessary
Economics would no longer be a useful subject
People would not worry about stretching out their limited incomes because they could
have everything, they wanted
Businesses would not need to fret over the cost of labor or health care
Governmentus would not need to struggle over taxes or spending or pollution because
nobody would care
No one would be concerned about the distribution of incomes among different people or
classes
There is no society who has this utopia of limitless possibilities. Our world is one of scarcity,
full of economic goods.
Economic good
A good that is scarce relative to the total amount of it that is desired. It must therefore be
rationed, usually by charging a positive price.
, Scarcity, law of
The principle that most things that people want are available only in limited supply (the
exception being free goods). Thus, goods are generally scarce and must somehow be
rationed, whether by price or some other means.
Given unlimited wants, it is important that an economy make the best use of its limited
resources Efficiency
Efficiency
Absence of waste, or the use of economic resources that produces the maximum level of
satisfaction possible with the given inputs and technology.
Denotes the most effective use of society’s resources in satisfying people’s wants and
needs.
In an economy with unchecked monopolies or unhealthy pollution or government
corruption
o it may produce less than would be possible without these factors
o it may produce a distorted bundle of goods that leaves consumers worse off than
the other could be.
Inefficient allocation of resource
Economic efficiency
Requires that an economy produces the highest combination of quantity and quality of
goods and services given its technology and scarce resources. An economy is producing
efficiently when no individual’s economic welfare can be improved unless someone else is
made worse off.
The essence of economics is to acknowledge the reality of scarcity and figure out how to
organize society in a way which produces the most efficient use of resources.
1.3 Uncertainty
Because of the economic problem wee need a guidance for how to make decisions and set
priorities.
What happens when you lose your job, consequences of climate change, change of
price/stock market
1.4 Microeconomics and Macroeconomics
Economics is divided into the two major subfields microeconomics and macroeconomics.
Microeconomics
Analysis dealing with the behavior of individual elements in an economy—such as the
determination of the price of a single product or the behavior of a single consumer or
business firm.
Founder: Adam Smith (1776)
o Identified the remarkable efficiency properties of markets and how the self-interest
of individuals working through the competitive market can produce a societal
economic benefit
