By the end of this chapter, students should understand:
➢ Differentiate between Microeconomics and Macroeconomics.
➢ Explain economics as the study of allocation of scarce resources.
➢ Explain how individuals face trade-offs.
➢ Explain opportunity cost.
➢ Explain the Production Possibilty Curve, Growth and Unemployment.
➢ Explain the circular flow of income.
a. The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.”
b. This makes some sense because in the economy we are faced with many decisions (just as a household is).
c. Fundamental economic problem: we live in a ...view middle of the document...
c. Microeconomics and Macroeconomics are closely intertwined because the changes in the overall economy arise from the decisions of millions of individuals it is impossible to understand macroeconomics developments without considering the microeconomic decisions
d. For example a macroeconomist might study the effects of a federal income tax cut on the overall production of goods and services. However to analyze this issue, he or she must consider how the tax cut affects the decision of households about how much to spend on goods and services.
a. Scarcity is the limited nature of society’s resources.
b. For example people have shortage of money & time i.e. we do not have enough money to buy all the things that we would like neither do we not have enough time to do all the things we would like to do.
c. We therefore people have to decide on how to allocate their time or money or any other that is scarce supply.
d. Therefore economics is the study of how society manages its scarce resources.
5. How People Make Decisions
➢ People Face Trade-offs
➢ That means that to get one thing that you like we have to give up another thing that we like.
➢ People have to trade off one goal with another
➢ For example, how does a student allocate his or her previous time?
i. She can spend all her time studying economics
ii. Spend all of it studying psychology
iii. Divide it between the two subjects.
➢ For each hour she studies one subject, she gives up an hour she could have used to study the other subject.
➢ For each hour she studies one subject, she gives up an hour that she could have spent napping, bike riding, watching TV or working part-time for some extra money to spend.
➢ Other example of trade off faced by different entities as below:
➢ Family income can be spent on food, clothing, transportation or vacation. Or they can come of the income for retirement or children’s college education.
➢ When the family spends an extra dollar on one of these goods, they have one dollar less on some other good.
➢ Society also faces trade offs e.g. “guns and butter trade off. If the society produces only these two good, producing more of guns (better national defencse) less of butter (consumer goods for a better standard of living) will be available
➢ The Government is also faced with a trade-offs e.g. on how to spend tax dollars; equality versus efficiency.
➢ With the implementation of laws that reduce pollution the government may be faced the benefit of a cleaner environment versus a reduction in income of the firms’ owners, workers and customers.
➢ Trade-offs are the choices among alternative goals or alternative cause of action.
➢ The cost of any action is measured in terms of forgone opportunities.
➢ Rational people make decisions by comparing marginal costs and marginal benefits.
➢ People change...