2. Scarcity
A fundamental fact dominates our lives: We want more than we can
get.
Scarcity is the condition in which our wants (for goods) are greater
than the limited resources (land, labor, capital, and
entrepreneurship) available to satisfy those wants.
In other words, we want goods, but not enough resources are
available to provide us with all the goods we want.
3. Resources
Land: The “gifts of nature” that we use to produce goods and services are called land.
In Economics we refer it as natural resources. Examples: Minerals, oil, wood, gas, coal,
water, air, forests, animals etc.
Labor: Consists of the physical and mental talents that people contribute to the
production process. For example, a person building a house is using his or her own labor.
Capital: The tools, instruments, machines, buildings, and other constructions that
businesses use to produce goods and services are called capital. One country might have
more capital than another; that is, it has more factories, machinery, tools, and the like.
Entrepreneurship: Refers to the talent that some people have for organizing the
resources of land, labor, and capital to produce goods, seek new business opportunities,
and develop new ways of doing things.
4. What is Economics?
The science of scarcity; the science of how individuals and
societies deal with the fact that wants are greater than the
limited resources available to satisfy those wants.
Economics is the study of how societies, governments,
businesses, households, and individuals use scarce resources to
produce valuable commodities and distribute them among
different people.
Economics defined as “a social science concerned with the
proper uses and allocation of resources for the achievement and
maintenance of growth with stability.”
5. What is Economics?
◦ Following fundamental problems an economy has to tackle:
1. What to produce – Which goods and quantities
2. How to produce – Production techniques (Labor intensive
or capital intensive)
3. For whom to produce – Distribution of national product
4. Allocation of resources – Scarce resources (money, labor,
and materials)
5. Problems of efficiency and growth – Efficiency of resource
use, growth, and stability
6. Microeconomics vs
Macroeconomics
Microeconomics
• It is the study of individual
economic units of an economy
• It deals with Individual Income,
Individual prices, Individual output,
etc.
•Example: The effects of rent control
on housing in Dhaka city, the impact
of foreign competition on the
Bangladesh garments industry.
Macroeconomics
• It is the study of economy as a
whole and its aggregates.
• It deals with aggregates like
national Income, general price level
(Inflation/Deflation), national
output, unemployment rate etc.
• Example: The effects of borrowing
by the government, the changes in
the economy’s unemployment rate
over time
7. Microeconomics vs.
Macroeconomics
Microeconomics
•Its central problem is price
determination and allocation of
resources.
•Price Theory: Explain the composition,
or allocation of total production – why
more of some things produced than of
others.
•Its main tools are demand and supply of
a particular commodity/factor.
•It helps to solve the central problem of
‘what, how and for whom’ to produce.
Macroeconomics
•Its central problem is determination of
level of Income and employment
•Income theory explains the levels of
total production and why the level rises
and falls.
•Its main tools are aggregate demand and
aggregate supply of the economy as a
whole.
•It helps to solve the central problem of
full employment of resources in the
economy.
8. Scopes of Microeconomics
Microeconomics is both positive and normative.
◦ It not only tells us how the economy operates but also how it should be
operated to promote general welfare.
Positive Science explains ”what is”
Normative Science tells “what ought to be” i.e. right or wrong of a thing.
Positive science describes while the normative science evaluates.
"government-provided healthcare increases public expenditures”
"government should provide basic healthcare to all citizens"
9. Positive versus Normative Analysis
Positive statements are statements that describe the world
as it is.
Called descriptive analysis
Normative statements are statements about how the world
should be.
Called prescriptive analysis
10. ?
?
Positive or Normative Statements?
An increase in the minimum wage will cause a
decrease in employment among the least-skilled.
11. ?
?
?
Positive or Normative Statements?
Higher federal budget deficits will cause interest
rates to increase.
12. ?
?
?
Positive or Normative Statements?
State governments should be allowed to collect from
tobacco companies the costs of treating smoking-
related illnesses among the poor.
13. Assumptions in Economics
“The consumers seek maximum satisfaction out of the money they
spend”
“The consumers’ tastes remain unchanged for fairly long periods
of time”
“The businessmen seeking maximum profits”
“The assumption of Perfect Competition”
“The concept of Equilibrium”
◦ Where consumer have maximum satisfaction and an Entrepreneur
earn maximum profit.
14. Assumptions in Economics
◦Ceteris paribus ‘other things being equal’
◦Most of the economic laws are preceded or end
with this phrase.
◦This means that the law will hold good if there are
no other changes taking place at the same time in
the related economic phenomena.
https://www.youtube.com/watch?v=BVsstySPzY0&feature=youtu.be
15. Assumptions in Economics
An economist might say, ceteris paribus,
• Raising the minimum wage increases unemployment;
• Increasing the supply of money causes inflation;
Most economists rely on ceteris paribus to build and test economic
models.
In simple language, it means the economist can hold all variables in
the model constant and tinker with them one at a time.
16. Opportunity Cost
The opportunity cost of an item is what you give up to
obtain that item.
Every time you make a choice, you incur an opportunity
cost.
The higher the opportunity cost of doing something is,
the less likely it will be done.
https://www.youtube.com/watch?v=SA16Qw09bXM
17.
18. Thinking on the Margin
According to economists, for most decisions, you think in terms of additional, or
marginal, costs and benefits, not total costs and benefits.
That’s because most decisions deal with making a small, or additional, change.
Not the Total Change.
Marginal Benefits: Additional benefits; the benefits connected with consuming
an additional unit of a good or undertaking one more unit of an activity.
Marginal Costs: Additional costs; the costs connected with consuming an
additional unit of a good or undertaking one more unit of an activity.
According to economists, when individuals make decisions by comparing
marginal benefits to marginal costs, they are making decisions at the margin.
19. Efficiency
In Economics sense, Efficiency is
Maximizing the Net Benefit
Optimal usage of resources
In economics, the right amount of
anything is the optimal or efficient
amount—the amount for which the
marginal benefits equal the
marginal costs.
Income level of garments workers - Microeconomics
Income level of all the citizen of Bangladesh – Macroeconomics. GDP = Gross Domestic Product
Inflation: Increase in general price level of all products and it means decreasing the purchasing power of money. The effects of rent control on housing in Bangladesh
Deflation: Decrease in general price level of all products and it means increasing the purchasing power of money.
Home work: What is inflation and deflation?
Which countries are suffering from inflation and deflation in 2020 and the rate. 5 countries.
Analyze the income of an individual or of an industry and not the national income of a country.
The export of garments products was going down in 2019 compare to 2018.
Government should give more facilities to garments industry in order to increase the export of goods.
Perfect Competition: Large Number of buyers and Sellers, commodity is homogeneous, buyer and seller can influence price.
An economist might say, ceteris paribus, raising the minimum wage increases unemployment; increasing the supply of money causes inflation;
Most, though not all, economists rely on ceteris paribus to build and test economic models. In simple language, it means the economist can hold all variables in the model constant and tinker with them one at a time.
If everything else is constant, increase in price will cause a decrease in demand of a product
So far we have established that people must make choices because scarcity exists.
For example, you have chosen to read this chapter. In making this
choice, you denied yourself the benefits of doing something else. You could have watched
television, texted friends, taken a nap, eaten a few slices of pizza, read a novel, shopped for
a new computer, and so on. Whatever you would have chosen to do is the opportunity cost
of your reading this chapter.
For example, if you would have watched television instead of
reading this chapter—if this was your next best alternative—then the opportunity cost of
reading this chapter is watching television.
example, Ryan, who is a sophomore at college, attends classes Monday through Thursday
of every week. Every time he chooses to go to class, he gives up the opportunity to do
something else, such as earn $12 an hour working at a job. The opportunity cost of Ryan’s
spending an hour in class is $12.
Now let’s raise the opportunity cost of attending class. On Tuesday, we offer Ryan $70
to skip his economics class. He knows that if he attends his economics class, he will forfeit
$70. What will Ryan do? An economist would predict that as the opportunity cost of
attending class increases relative to its benefits, Ryan is less likely to go to class.
For example, a consumer is willing to pay $5 for an ice cream, so the marginal benefit of consuming the ice cream is $5. However, the consumer may be substantially less willing to purchase additional ice cream at that price – only a $2 expenditure will tempt the person to buy another one. If so, the marginal benefit has declined from $5 to $2 over just one extra unit of ice cream. Thus, the marginal benefit declines as the consumer's level of consumption increases.
For example, a production line currently creates 10,000 widgets at a cost of $30,000, so that the average cost per unit is $3.00. However, if the production line creates 10,001 units, the total cost is $30,002, so that the marginal cost of the one additional unit is only $2. This is a common effect, because there is rarely any additional overhead cost associated with a single unit of output, resulting in a lower marginal cost
Marginal = Additional