t1 - What Is Economics

BECO1000 Principles of Microeconomics (008, 009), 2024/2025-1
WHAT IS ECONOMICS?
(Textbook: Pages 31-34, 39-41, 78-79)
Definition of Economics
Economics is a social science subject that studies the choice making of individuals, including
households, firms and governments, as they cope with scarcity.
Economics as a Social Science

As social scientists, economists seek to discover how the economic world works. In pursuit
of this goal, like all scientists, economists distinguish between positive and normative
statements. Economics first got off the ground in the late 1700s, so it is a young science
compared with, for example, physics, and much remains to be discovered.
POSITIVE STATEMENTS
A positive statement is about what is without making judgments. It says what is currently
believed about the way the world operates. It might be right or wrong, but can be tested by
checking it against the facts.
China is the largest trading partner of the United States.
NORMATIVE STATEMENTS
A normative statement is about what ought to be. It depends on values, which one may agree
or disagree, but cannot be tested. Policy goals are normative statements.
The United States should cut its imports.
Scarcity, Choice and Opportunity Cost

WANTS [unlimited (variety & quantity)]
goods: tangible (physical objects)
services: intangible (tasks performed for people)
RESOURCES (FACTORS OF PRODUCTION) [limited]

land: natural resources
(gifts of nature: land, minerals, oil, gas, coal, water, air, forests, fish, …)
labor (including entrepreneurship): human resources

(physical and mental efforts [including organizational power] of people)
capital: man-made resources

(tools, instruments, machines, buildings, …)
(human capital: knowledge and skill that people obtain from education, on-the-job
training and work experience - determines the quality of labor)
1
ECONOMIC ACTIVITIES
Production is the process that transforms resources into goods and services.
Consumption is the process of using goods and services to satisfy wants.
SCARCITY
A fundamental fact dominates our lives: We want more than we get. What everyone in a
society can get is limited by the productive resources available. Our inability to get
everything we want, that is, resources are not enough to satisfy all wants, is called scarcity.
CHOICE [basic economic questions]

Because we face scarcity, we must make choices. And when we make a choice, we select
from the available alternatives, and answer the following 3 basic economic problems:
1. What goods and services get produced?
2. How are the goods and services produced?
3. For whom are the goods and services produced?
OPPORTUNITY COST
Choices are tradeoffs. A tradeoff is an exchange, giving up one thing to get something else.
The benefit of getting something is the gain or pleasure that it brings and is determined by
preferences - by what a person likes and dislikes and the intensity of those feelings. Such
benefit can be measured by the most that a person is willing to give up.
The highest-valued alternative that must be given up to get something is the opportunity cost.
Economic Coordination
DECISION-MAKING/ECONOMIC UNITS
Household
A group of people living together under one roof who owns factors of production.
Households are the primary consuming units in an economy (consumers).
Firm
An organization that transforms factors of production into goods and services.
Firms are the primary producing units in an economy (producers).
Government
A unit that provides goods and services to households and firms and redistributes income and
wealth.
2
MARKET
A market is an arrangement that enables buyers and sellers interact and engage in exchange.
Goods markets
Markets in which goods and services are exchanged.
Factor markets
Markets in which factors of production are exchanged.
ECONOMIC SYSTEM
An economic system is a way (economy) whereby decision-making units work together to
solve the 3 basic economic problems.
Command (Centrally-planned) Economy

A central government uses a central plan.
Market Economy
Households and firms pursue their own self-interest (without central direction or regulation)
and interact in markets. Markets coordinate decisions through price adjustment.
Prices of goods and services reflect what households are willing to pay.
Prices of factors of production determine how much it costs to produce a good or service,
and also the income and wealth of households.
Mixed Economy
Both markets and government involvement.
3
CIRCULAR FLOWS IN A MARKET ECONOMY
Households choose the quantities of labor, land, capital, and entrepreneurial services to sell
or rent to firms in exchange for wages, rent, interest, and profits. Households also choose
how to spend their incomes on the various types of goods and services available. Firms
choose the quantities of factors of production to hire and the quantities of goods and services
to produce. Goods markets and factor markets coordinate these choices of households and
firms. The counterclockwise red flows are real flows - the flow of factors of production from
households to firms and the flow of goods and services from firms to households. The
clockwise green flows are the payments for the red flows. They are the flow of incomes from
firms to households and the flow of expenditure on goods and services from households to
firms.
4
CIRCULAR FLOWS IN A MIXED ECONOMY
Scope of Economics
MICROECONOMICS is the study of the choices that individuals make and the way these
choices are coordinated in markets.
MACROECONOMICS is the study of the performance of the economy as a whole.

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BECO1000 Principles of Microeconomics (008, 009), 2024/2025-1

Economics as a Social Science

Scarcity, Choice and Opportunity Cost

services: intangible (tasks performed for people)

RESOURCES (FACTORS OF PRODUCTION) [limited]

labor (including entrepreneurship): human resources

capital: man-made resources

Consumption is the process of using goods and services to satisfy wants.

CHOICE [basic economic questions]

2. How are the goods and services produced?

3. For whom are the goods and services produced?

Households are the primary consuming units in an economy (consumers).

Firms are the primary producing units in an economy (producers).

Command (Centrally-planned) Economy

MACROECONOMICS is the study of the performance of the economy as a whole.

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