Introduction to Economics Lecture 1. What is Economics?. Economics is a social science. The big two concepts that Economics deals with are : Resources are scarce ( limited) 2) Society has unlimited needs and want.
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Economics is a social science.
The big two concepts that Economics deals with are :
Resources are scarce (limited)
2) Society has unlimited needs and want.
In Economics we try to find the “best” way to allocate limited resources in society.
In a model we do the following things:
All three of these are required in combination at a time to produce a commodity.
Question: What are the returns of factors of production?
Production Possibility Frontier:
It shows the maximum amount of goods and services that can be efficiently produced in an economy by available inputs/resources and technology.
All the points on the PPF are efficient. ( Here efficient means no more output can be produce from the given inputs/resources. That means there is no wastage of resources)
All the points inside the PPF are inefficient.
All the points outside the PPF are infeasible / impossible
Two factors can affect the PPF
If the economy reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra X1 – Xo consumer goods is Yo – Y1 capital goods.
The law of demand states that, holding all other factors constant, when the price of a product increases, quantity demanded decreases; likewise, as the price of a product decreases, quantity demanded increases. This implies that price of a product and its quantity demanded are negatively related.
Demand Curve: It shows how price and quantity demanded are related.
Demand curve is downward sloping.
Why does demand curve slopes downward?
For the initial units of a good an individual gets higher satisfaction from consuming that good. So he is willing to pay more initially. But as he consumes more of a good his satisfaction from consuming the good decreases and so he will be willing to pay less. So the willingness to pay/price is inversely related to quantity demanded. That’s why demand curve is downward sloping.