Chapter 1

Introduction to Economics

• Economics is a social science that investigates how individuals and societies make “optimal choices” under conditions of scarcity.

• Core insight: Economic wants exceed productive capacity; therefore, every society must confront trade-offs.

The Economic Perspective

Key Features

1. Scarcity & Choice – Resources are limited; selecting one option means giving up another.

2. Rational Self-Interest – Decision-makers pursue the option that maximizes their satisfaction (utility for individuals, profit for firms).

3. Marginal Analysis – Decisions are made by comparing marginal benefit (MB) with marginal cost (MC); action is taken up to the point where MB = MC.

Scarcity and Choice

• Resources are scarce, hence:

  • Choices are unavoidable.

  • Opportunity cost =\, value of the next-best alternative forgone.

• "There’s no free lunch" – every decision incurs opportunity cost even if money is not exchanged.

Purposeful (Rational) Behavior

• Individuals: aim to maximize utility.

• Firms: aim to maximize profit.

• Decision-makers weigh benefits & costs to reach preferred (desired) outcomes.

Marginal Analysis in Depth

• Marginal means “extra” or “additional.”

• Core rule: undertake an action when MB \ge MC; stop when MB = MC.

• Helps allocate scarce time, money, or other resources efficiently.

Economic Methodology

Scientific Method

1. Observe real-world behavior & outcomes.

2. Formulate a hypothesis.

3. Test the hypothesis with data.

4. Accept, reject, or modify the hypothesis.

5. Continue testing as necessary for greater accuracy.

Theories, Principles, & Models

• Economic principles = statements about economic behavior that enable prediction.

• Feature generalizations (typical tendencies of groups, not individuals).

• Employ the “other-things-equal” (ceteris paribus) assumption to isolate effects.

• Conclusions are often expressed graphically for clarity.

Microeconomics vs. Macroeconomics

Positive vs. Normative Economics

• Positive Economics: deals with facts and cause-and-effect relationships; statements are testable.

• Normative Economics: incorporates value judgments about what the economy should be; statements are subjective.

The Individual’s Economizing Problem

Limited Income, Unlimited Wants

• Individuals face finite \text{income} but virtually infinite \text{wants}.

• The constraint is illustrated by a budget line (or budget constraint).

Budget-Line Illustration (Books vs. DVDs)

• Income: \$120.

• Price of a DVD: \$20 \Rightarrow max DVDs = 6.

• Price of a paperback book: \$10 \Rightarrow max books = 12.

• Any bundle on or below the line is attainable; any bundle above is unattainable.

• A change in income shifts the entire budget line outward (higher income) or inward (lower income).

Trade-Offs & Opportunity Costs

• Moving along the budget line shows how acquiring more of one good requires giving up some of the other.

Global Perspective: Per-Capita Income (2008)

• Highlights huge international disparities in purchasing power and living standards.

Society’s Economizing Problem

Scarce Resources (Factors of Production)

1. Land – natural resources.

2. Labor – physical & mental talents of humans.

3. Capital – manufactured aids to production (machinery, tools); NOT the same as money.

4. Entrepreneurial Ability – special human resource that:

   • Takes initiative

   • Makes strategic decisions

   • Innovates new products/processes

   • Bears risk of business failure

Production Possibilities Model

Assumptions

• Full employment of resources.

• Fixed quantity & quality of resources.

• Fixed technology.

• Economy produces two goods (simplification).

Production Possibilities Table

• Plotting these pairs yields the Production Possibilities Curve (PPC), concave to the origin due to the Law of Increasing Opportunity Costs.

Law of Increasing Opportunity Costs

• As production of good X increases, the opportunity cost of each additional unit (in terms of forgone units of Y) rises because resources are not perfectly adaptable between uses.

Attainable vs. Unattainable Points

• Any point on or inside the PPC is attainable (though inside implies unemployment/inefficiency).

• Points outside the PPC are currently unattainable.

Optimal Allocation

• Combine the MB and MC schedules:
  

  Quantity of Pizza (\times 100{,}000)	MB	MC
  0	15	0
  1	10	?
  2	5	?

  The optimal quantity is where MB = MC (exact numerical MC values implied by the PPC slope).

      

  

  Economic Growth: Shifting the PPC Outward

  • Causes:

    1. More resources (land, labor, capital).

    2. Improved resource quality (education, health, skills).

    3. Technological advances (better production methods).

  • Growth allows the economy to move from points A, B, C, D, E to A', B', C', D', E' — previously unattainable bundles become feasible.

  Revised Production Alternatives After Growth

  

  Alternative	Pizzas (hundred-thousands)	Industrial Robots (thousands)
  A'	14	0
  B'	12	2
  C'	9	4
  D'	5	6
  E'	0	8

  Present Choices & Future Possibilities

  • Economy that devotes more resources to “goods for the future” (capital goods, R&D, education) grows faster than one focused on present consumption.

  • Diagrammatically, Futureville chooses a point with high future goods, shifting its PPC outward more rapidly than Presentville.
    
    

    

  International Trade & Specialization

  • By specializing in goods for which it has a comparative advantage and trading for others, a nation can consume beyond its domestic PPC.

  • Trade is therefore an alternative route to higher standards of living without waiting for internal economic growth.

  Comprehensive Summary

  • Scarcity forces individuals and societies to confront the economizing problem.

  • Choices are guided by rational comparisons of marginal benefits and marginal costs.

  • Analytical tools (budget lines, PPCs) illustrate trade-offs, opportunity costs, efficiency, and growth.

  • Long-run living standards depend on resource allocation between present consumption and future-oriented investment, as well as on openness to specialization and trade.

  • Policymakers face three broad options to mitigate scarcity:

    1. Economic Growth (expand resource base & technology).

    2. Improve resource use (raise productive & allocative efficiency).

    3. Curb excessive wants (equity considerations, cultural change).

  These notes encapsulate every major and minor concept presented, along with numerical illustrations, methodological foundations, and real-world implications. They can serve as a standalone study guide for understanding the limits, alternatives, and choices central to economic reasoning.