ECONOMICS

1 3

ECONOMICS
MICROECONOMICS MACROECONOMICS
• Basic Economic concepts • National Income accounting
• Supply, Demand and Market • Inflation and Unemployment
• Supply, Demand & Government • Financial, Monetary and
Policies Banking system
• Elasticity • Macroeconomics Policies
• Production and Cost
• Market structures

2 4
1 2
 MICROECONOMICS Factors of productions
• Basic Economic concepts Resource inputs used to produce goods and
• Supply, Demand and Market equilibrium services.
• Land
• Supply, Demand and Government Policies
• Labor
• Elasticity • Capital
• Market Failures: Externality and public goods • Entrepreneurship.
• Production and Cost
• Market structures

5 7

BASIC ECONOMIC CONCEPTS Three Basic Economic Questions

• Factors of production • What to produce?

• Basic economic questions • How people decide what to buy, how much to work, save,
and spend
• Circular flow diagram
• How to produce?
• Production Possibility frontier
• find an optimal method of producing goods and services.
• Microeconomics vs. Macroeconomics
• decide how much to produce, how many workers to hire
• Normative vs. Positive analysis
• For whom to produce?
• Absolute advantage and comparative advantage.
• How society decides how to divide its resources between
• Specialization and Exchange national defense, consumer goods, protecting the
environment, and other needs

6 8
3 4
 Principles of Economics
• Scarcity: Society has limited resources, cannot
produce all the goods and services people wish to
have
• Economics: The study of how society manages its
scarce resources
• How People Make Decisions
• How People Interact
• How the economy as a whole works
Source: [Link]

9 11

How people make decision

• People face trade-offs among alternative goals
• 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 their behavior in response to the
incentives they face

10 12
5 6
 1. Economics is broadly defined as the study of how individuals and societies:
3. The opportunity cost of making a specific choice is:
a. make choices about work and the division of labor.
a. useful primarily as an indicator of relative prices.
b. attempt to maximize their financial incomes and wealth. b. Its nominal costs in terms of all other goods.
c. answer the basic economic questions of “Why, Where, and When.” c. the information that guides your decision.
d. allocate scarce resources in attempts to satisfy human wants. d. measured by the subjective value of the best alternative you sacrifice.

4. A furniture maker currently produces 100 tables per week and sells
2. Economist often say there is no such thing as a free lunch. What do
them for a profit. She is considering expanding her operation in order to
economists mean when they say such a thing?
make more tables. Should she expand?
a. People never offer a lunch for free. a. Yes, because making tables is profitable.
b. Even if someone literally offers you a free lunch, there is an opportunity cost b. No, because she may not be able to sell the additional tables.
to the resources that are used to produce your free lunch. c. It depends on the marginal cost of producing more tables and the marginal revenue
c. Some resources cause significant negative externalities. she will earn from selling more tables.
d. It depends on the average cost of producing more tables and the average revenue
d. Economists, in this case, are talking about common resources. she will earn from selling more tables.

13 15

3. You have decided that you want to attend a costume party as Black Panther. 5. A rational decision maker
You estimate that it will cost $40 to assemble your costume. After spending $40 a. ignores marginal changes and focuses instead on “the big picture.”
on the costume, you realize that the additional pieces you need will cost you b. ignores the likely effects of government policies when he or she makes
$25 more. The marginal cost of completing the costume is choices.
A) $15. c. takes an action only if the marginal benefit of that action exceeds the
B) $25. marginal cost of that action.
C) $40. d. takes an action only if the combined benefits of that action and previous
D) $65.
actions exceed the combined costs of that action and previous actions.
4. If your tuition is $5,000 this semester, your books cost $600, you can only work 6. To say that “people respond to incentives” is to say that
20 rather than 40 hours per week during the 15 weeks you are taking classes a. changes in costs (but not changes in benefits) influence people’s decisions
and you make $15 per hour, and your room and board is $3,000 this semester
and their behavior.
(same as if not attending college), then your opportunity cost of attending
b. changes in benefits (but not changes in costs) influence people’s decisions
college this semester is
A) $5,600.
and their behavior.
B) $5,900. c. changes in benefits or changes in costs influence people’s decisions and
C) $10,100. their behavior.
D) $11,600. d. tradeoffs can be eliminated by rational people who think at the margin.
14 16
7 8
 How people interact 7.
a.
Which of the following statements about trade is false?
Trade increases competition.
b. With trade, one country wins and one country loses.
• Trade and interdependence can be mutually c. Cambodia can benefit, potentially, from trade with any other country.
beneficial d. Trade allows people to buy a greater variety of goods and services at lower
• Markets are usually a good way of coordinating cost.
economic activity among people 8. The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
• The government can potentially improve market b. government should become involved in markets when trade between
outcomes by remedying a market failure or by countries is involved.
promoting greater economic equality c. government should become involved in markets when those markets fail
to produce efficient or equitable outcomes.
d. All the above are correct.

17 19

The Different Kinds of Goods 9. Which of the following observations was made famous by Adam Smith in his
book The Wealth of Nations?
a. There is no such thing as a free lunch.
b. People buy more when prices are low than when prices are high.
c. No matter how much people earn, they tend to spend more than they earn.
d. Households and firms interacting in markets are guided by an “invisible hand”
that leads them to desirable market outcomes.

10. The term “market failure”

a. means the same thing as “market power.”
b. refers to the dissolution of a market when firms decide to quit producing a
certain product.
c. refers to the failure of a market to produce an efficient allocation of resources.
d. refers to government’s failure to enforce the property rights of households or
firms that participate in a certain market.
18

18 20
9 10
 How economy as a whole works Circular-flow diagram
Households:
• Productivity is the ultimate source of living § Own the factors of production,
standards sell/rent them to firms for income
§ Buy and consume goods & services
• Growth in the quantity of money is the ultimate
source of inflation Firms Households
• Society faces a short-run trade-off between
inflation and unemployment Firms:
§ Buy/hire factors of production,
use them to produce goods and services
§ Sell goods & services

21 23

Ten Principles of Economics Circular-flow diagram

Revenue Spending
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income
1-22 profit

22 24
11 12
 Production possibilities frontier
Market Interactions
• A graph: combinations of output that the economy can
Foreign market possibly produce
Product
participants markets
• Given the available
• Factors of production and technology
Households Governments Business firms • Example:
• Two goods: computers and wheat
• One resource: labor (measured in hours)
Foreign market
Factor
markets • Economy has 50,000 labor hours per month available for
participants production
27

25 27

11. Households play what role(s) in the circular flow diagram? Production possibilities frontier
a. purchasers of factors of production and sellers of services
b. purchasers of factors of production and sellers of goods • Producing one computer requires 100 hours labor.
c. purchasers of goods and services and sellers of factors of production • Producing one ton of wheat requires 10 hours labor.
d. purchasers of goods and services only
Employment of
Production
labor hours
12. In a circular-flow diagram,
a. taxes flow from households to firms, and transfer payments flow from firms Computers Wheat Computers Wheat
to households. A 50,000 0 500 0
b. income payments flow from firms to households, and sales revenue flows
from households to firms. B 40,000 10,000 400 1,000
c. resources flow from firms to households, and goods and services flow from C 25,000 25,000 250 2,500
households to firms.
d. inputs and outputs flow in the same direction as the flow of dollars, from D 10,000 40,000 100 4,000
firms to households. E 0 50,000 0 5,000

26 28
13 14
 Production possibilities frontier Point on
Production 13. The production possibilities frontier demonstrates the basic economic
principle that:
graph Com-
Wheat a. economies are always efficient.
Moving along a PPF puters
b. assuming full employment, to produce more of any one thing, the economy must
Involves shifting Wheat A 500 0 produce less of at least one other good.
(tons)
resources from the B 400 1,000
c. assuming full employment, an economy is efficient only when the production of
production of one good 6,000 capital goods in a particular year is greater than the production of consumption
E C 250 2,500 goods in that year.
to the other 5,000
d. assuming full employment, supply will always determine demand.
Society faces a tradeoff 4,000 D D 100 4,000
Getting more of one 3,000 E 0 5,000 14. All points on a production possibilities frontier show the
C
good requires sacrificing a. maximum satisfaction that households receive from their purchases of goods.
2,000 b. minimum quantities of resources that must be used to produce a given quantity of
some of the other
B output.
The slope of the PPF 1,000
A c. maximum output that society can produce with given resources and technology.
The opportunity cost of 0
d. minimum output that society can produce with given resources and technology.
0 100 200 300 400 500 600
one good in terms of
the other Computers

29 31

Production Possibility frontier 15. Assume that Falda and Varick can switch between producing wheat
and producing cloth at a constant rate.

• Point F: 100 computers, 3000 tons wheat

Quantity Produced in 1 Hour
• Requires 40,000 hours of labor 6,000 Bushels of Wheat Yards of Cloth
• Possible but not efficient: could get 5,000 Falda 8 12
more of either good without sacrificing 4,000 G Varick 6 15
any of the other 3,000
F Refer to Table Falda’s opportunity cost of one yard of cloth is
2,000 a. 2/3 bushel of wheat and Varick’s opportunity cost of one yard of cloth is 2/5
1,000 bushel of wheat.
• Point G: 300 computers, 3500 tons wheat b. 2/3 bushel of wheat and Varick’s opportunity cost of one yard of cloth is 5/2
0
• Requires 65,000 hours of labor. bushels of wheat.
0 100 200 300 400 500 600
c. 3/2 bushels of wheat and Varick’s opportunity cost of one yard of cloth is 2/5
• Not possible because the economy only bushel of wheat.
has 50,000 hours d. 3/2 bushels of wheat and Varick’s opportunity cost of one yard of cloth is 5/2
bushels of wheat.
30 32
15 16
 lemonade
Alice and Betty’s Production Possibilities in one 8-hour day. 500

450 Alice’s 18. Which of the following questions would NOT be of particular interest to a
16. Refer to Figures 400 Production microeconomist?
a. For Alice, the opportunity cost to produce a unit of lemonade is 350 Possibilities
300 Frontier a. Why do national economies grow?
½ unit of pizza.
b. At point A and B, Alice produces 100 pitchers of lemonade and
250

200 A
b. What percentage of consumer income is spent on entertainment?
200 pizzas while Betty produces 180 pitchers of lemonade and 150
c. Why do workers prefer the 4-day workweek?
180 pizzas. 100

c. For Betty, The opportunity cost to produce a unit pizza is 2/3 unit 50 d. What happens to worker productivity when a business shifts to a 4-day
of lemonade. 50 100 150 200 250 300 350 400 pizzas
workweek?
d. All of the above are correct. 19. The relationship between microeconomics and macroeconomics is analogous
lemonade
500

450 Betty’s Production

to the relationship between
17. Refer to Figures, 400
Possibilities a. the behavior of a single baseball player and the collective behavior of the entire
350
Frontier
a. Alice has comparative advantage in producing lemonade 300 team out on the baseball field.
b. Betty has comparative advantage in producing Pizza
250
b. the behavior of a single race car driver and the collective behavior of all cars racing
200

c. Betty has absolute advantage in producing both products 150

B (180,180)
on a race track.
100
c. the behavior of one football player and the collective behavior of the entire football
d. All of the above are correct.
team out on the field.
50

d. all of the above

50 100 150 200 250 300 350 400 pizzas

33 35

Positive vs. Normative

Macroeconomics & Microeconomics
• Microeconomics is The study of how households and firms make • Positive analysis: descriptive
decisions and how they interact in markets • Positive analysis is the use of theories and models to predict the impact of
• supply and demand a choice.
• pricing of output • For example:
• production processes
• cost structure • What will be the impact of an import quota on foreign cars?
• Distribution • What will be the impact of an increase in the gasoline excise tax?
• Macroeconomics is The study of economy-wide phenomena
• national income analysis
• Normative Analysis: prescriptive
• gross domestic product • Normative analysis addresses issues from the perspective of “What ought
• unemployment to be?”
• inflation • For example:
• fiscal policy
• monetary policy • Consider the equity and efficiency trade-off of an increase in the
gasoline
36 excise tax versus import restriction on foreign oil.
34 36
17 18
 20. “An increase in interest rates will lower economic growth.” This statement is
a. a positive economic statement.
b. a normative economic statement.
c. untrue in every case.
d. controversial, and so not a valid economic issue.

21. The distinction between positive and normative economics

a. is that positive economics applies only to microeconomic problems.
b. is that normative economics applies only to microeconomic problems.
c. explains why economics is not a social science but a natural science.
d. helps us to understand why economists sometimes disagree with one
another.

37

• People face Trade-off: To get something that we like, we have to give

up something else that we also like
• Opportunity cost: Whatever must be given up to obtain some item
• People respond to Incentives
• Rational people make decision at the margin
• Trade can make everyone better off
• Markets Are usually a good way to organize economic activity
• Market failure: Governments can sometimes improve market outcomes
• Productivity: Standard of living depends on its ability to produce goods
and services
• Inflation: Prices rise when the government prints too much money
• Short-run trade-off between inflation and unemployment
38
19