1. Definitions: Economics, Micro, and Macro
Economics: A social science that studies the efficient allocation of scarce resources to attain the maximum fulfillment of unlimited human needs.
Microeconomics: Concerns the economic behavior of individual decision-making units such as households, firms, markets, and industries.
Macroeconomics: Deals with the aggregate behavior of all decision-making units and the economy as a whole (e.g., national income, employment, inflation).
2. Production Possibilities Curve (PPC)
The Production Possibilities Curve (PPC) shows the various possible combinations of two goods that a society can produce, given its fixed resources and technology. The curve is downward-sloping and concave (bowed-out).
- Points ON the curve (Efficient): All resources are fully and efficiently utilized.
- Points INSIDE the curve (Inefficient): Resources are underused or unemployed.
- Points OUTSIDE the curve (Unattainable): Cannot be produced with current resources.
3. The Three Principles of Economics
1. Optimization
This is the first principle. It means people try to pick the best feasible option, given the available information, knowledge, and experience. This involves evaluating trade-offs, budget constraints, and opportunity costs.
2. Equilibrium
This is the second principle. It's a situation where everyone is simultaneously optimizing, so no one believes they would benefit by changing their own behavior, given the choices of others.
3. Empiricism
This is the third principle. It refers to analysis that uses data. Economists use data to test theories, evaluate policies, and determine what is causing things to happen in the world.
4. Apartment Rental Choice (Optimization)
Optimization means finding the choice with the lowest Total Cost. Total Cost = Explicit Cost (Rent) + Implicit Cost (Commuting Time). Let's assume your time is valued at $10/hour. Click the button to find the optimal choice.
| Apartment | Rent (Explicit) | Commute (hr/mo) | Time Cost (Implicit) | Total Cost |
|---|---|---|---|---|
| Very Close | $1,180.00 | 5 | ||
| Close | $1,090.00 | 10 | ||
| Far | $1,030.00 | 15 | ||
| Very Far | $1,000.00 | 20 |
Choice: The "Far" apartment is the optimal choice. It has the lowest total cost ($1,180) when considering both the explicit cost (rent) and the implicit opportunity cost (value of your time).
5. Demand, Demand Curve, and Shifts
Demand: Willingness and ability to purchase a good at various prices.
Demand Curve: A downward-sloping line showing the inverse relationship between price and quantity demanded.
- Favorable change in taste
- Increase in income (for normal goods)
- Increase in the price of substitutes
- Increase in the number of buyers
- Unfavorable change in taste
- Decrease in income (for normal goods)
- Decrease in the price of substitutes
- Decrease in the number of buyers
6. Supply, Supply Curve, and Shifts
Supply: Willingness and ability to provide a good at various prices.
Supply Curve: An upward-sloping line showing the positive relationship between price and quantity supplied.
- Decrease in input prices
- Technological advancement
- Good weather
- Increase in subsidies
- Increase in input prices
- Bad weather
- Increase in taxes
7. Budget Set & Budget Constraint
Budget Constraint: The line showing max combinations of two goods affordable given income/prices.
Budget Set: All affordable combinations (on or inside the constraint).
Example: Your budget is $300. Sweaters are $25, and Jeans are $50. You can buy 12 sweaters (Y-intercept) or 6 jeans (X-intercept).
Watch what happens when your income increases to $600.
8. Elasticity of Demand
Elasticity measures the responsiveness of quantity to a price change. Here are the different types of demand elasticity.
Inelastic
A steep curve. Quantity is unresponsive to price changes (e.g., necessities).
Elastic
A flat curve. Quantity is very responsive to price changes (e.g., luxury goods).
Perfectly Inelastic
A vertical curve. Quantity does not change at all as price changes (e.g., insulin).
9. Price Elasticity of Supply
The degree of responsiveness of the quantity supplied of a product to a change in its price. It is calculated as:
(Percentage Change in Quantity Supplied) / (Percentage Change in Price)
Example: A 20% increase in price leads to a 20% increase in quantity supplied. Es = (20% / 20%) = 1. This is called Unit-Elastic Supply.
Perfectly Elastic
Es = ∞
Horizontal curve.
Unit-Elastic
Es = 1
Passes through origin.
Perfectly Inelastic
Es = 0
Vertical curve.
10. Is Instagram Free? (An Economic View)
No, Instagram is not "free" in an economic sense. While it has no monetary price, it has a significant cost: your time.
Opportunity Cost
The value of the next best alternative you sacrifice. Four hours on social media has a high opportunity cost (e.g., 4 hours of studying, working, or sleeping).
Trade-off
You are making a choice (a trade-off) to spend your scarce resource (time) on social media instead of those other activities.
Marginal Analysis
You decide to use it "one more minute" at a time. You stop scrolling when the marginal cost (what you could be doing) exceeds the marginal benefit.
Optimization
You are optimizing if you use those 4 hours to maximize your total satisfaction. If you regret not studying (a higher-value activity), you have not optimized.
11. The Concept of Scarcity
Scarcity is the fundamental economic problem.
It refers to the fact that all economic resources (like land, labor, and capital) needed to produce goods and services are finite or limited in supply.
However, human wants for these goods and services are unlimited.
Scarcity is this basic imbalance between unlimited wants and limited resources. Because of scarcity, we are forced to make choices, which in turn involves opportunity costs.