Unit 1: Introduction to Economics
Before we dive into the principles of microeconomics, we need to define some of the major ideas that lie at the heart of economics. What is the economic way of thinking? What do economists mean when they discuss market structure and the invisible hand?
In this unit we identify and define these terms before addressing the driving principles behind microeconomics: the idea that individuals and firms (economic agents) make rational choices based on self-interest. These decisions are necessary, because
resources are scarce. In other words, no good or item is infinitely available. We will also introduce a number of economic models, the assumptions and constraints associated with each, and the ways they help us better understand real-life situations.
Completing this unit should take you approximately 6 hours.
Upon successful completion of this unit, you will be able to:
- explain the economic way of thinking;
- identify how individual economic agents make rational choices and optimize the use of scarce resources at hand;
- apply marginal analysis to make optimal choices by identifying whether choices are efficient or equitable; and
- identify basic economic models related to production, trade, and the circular flow of resources to understand economic issues.
1.1: Individual Choice, Scarce Resources, Choices, and Opportunity Costs
Read this section to learn about the basic problem of scarcity and the study of economics. Be sure to click through to read each of the pages in this section. As you read, reflect on the things that society needs and the resources that are needed for production like natural resources, money, labor, etc. Every society needs to take into account the problem of scarcity, and that decisions are needed to choose from producing one thing over another. An example is choosing between having a natural wild environment by not developing a piece of land, or developing that land for housing.
- Read this section to encounter the three fundamental questions that economists face and to learn about opportunity costs. Attempt the problems presented in the "Try It" section, and note how eventually every decision boils down to choosing between competing alternatives.
- Read this section to understand the concept of a budget constraint and how people make decisions when faced with this type of constraint. In economics, a budget constraint is a model that represents two possible things to choose from when spending some income. For example, suppose that you are a store manager and you have $100 to spend on two things for decorations for the store: flower arrangements at $10 each and posters at $5 each. A budget constraint for $100 will then be the different combinations with different number of flower arrangements and posters.
- Watch this video, which gives several examples of scarce resources that all of us confront as we make decisions on consumption and production.
- Watch this video, which explains the concept of scarcity and why people make choices in their best interests. Make sure that you go back to the reading from before titled "What Economics Is and Why It’s Important" as it explains to you the meaning of scarcity.
- This is an optional lecture and not a requirement of the course. In this unit, you learned that scarce resources underlie every economic decision that is made in society. You also learned that because of these scarce resources, there are trade-offs between alternate choices. In this guest lecture, Bjorn Lomborg advances this idea by discussing some pressing issues that need to be addressed. This talk should help you to identify the economic way of thinking, which will be elaborated upon in the next subunit.
1.2: Getting to Know Economics
- Read this section, and take a moment to read through the stated learning outcomes for this chapter, which you can find at the beginning of the section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of the section before checking the answers.
- Watch this video, which explains the use of economic models for solving and understanding economic issues. When you think about an economic model, think about the simplicity of it to represent economic concepts. Most economic models come from the economic theory and used graphically. An example is the budget constraint graph from the previous reading which considered only two products and how we decide on purchasing different combinations of them according to the budget that was allocated.
- Read this article to learn about one of the fundamental terms in economics: marginal analysis. Specifically, understand the concept of marginal benefit and marginal cost and what is meant in economics when we say that individuals make rational choices at the margin. Also, complete the problems in the "Try It" box and check your answers.
- Read this section and its learning outcomes, which should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of the section before checking the answers.
1.3: Review of Data Representation and Mathematics for Economics
- Follow the steps for solving simple mathematical equations with variables. Answer the quiz questions and check your answers.
- Watch this video, which provides a review of the basics of linear algebra you will need for this course, namely the ability to understand and graph straight lines, their slope, and their x- and y-intercepts. If you know this material well, don't dwell. Continue working your way through Unit 1.
- Read this section on the reasoning behind economic models, which are just representations of reality or theoretical thinking for understanding something. Pay attention to the explanation about the Circular Flow Diagram (Figure 2), which represents how the economy and its actors are related to one another. Make sure to answer the quiz questions.
1.4: The Production Possibility Frontier
Read Sections 2.1 and 2.2. Take a moment to read through the stated learning outcomes for this chapter, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Also, attempt the "Try It" problems for each section before checking your answers.
The first section of the chapter will introduce you to the four factors of production that are present in the economy: labor, capital, natural resources, and entrepreneurship. Using any two factors of production, you can then learn to construct the production possibility frontier (PPF) in a two plane model. Note the economic implications of the downward slope and the bowed-out shape of the PPF curve. Also, note the meaning of producing on the curve versus inside the curve. Lastly, think about what it means to move along the curve- Watch this video about the production possibilities frontier, which is a representation of an economic model that shows you how we make decisions based on scarce resources.
Watch this lecture about opportunity costs with the use of the production possibilities frontier. Make sure to go back to the main reading material for Unit 1.4 as it explains the meaning behind the concept of the PPF. In this video you will see how we can apply the production possibilities model to examine the choices to produce more of some good and less of another. The PPF shows the goods and services that an economy is capable of producing – its possibilities – given the factors of production and the technology it has available. The model specifies what it means to use resources fully and efficiently when a combination of the goods is represented on the line. Think about what it would mean to be: (1) inside the line and (2) outside the line.
- Watch this video lecture about increasing opportunity costs when you move a production point in the production possibilities frontier.
- Watch this video about allocative efficiency and marginal benefit with the use of the production possibilities frontier.
- Watch this video about economic growth through investment with the use of the production possibilities frontier.
1.5: Comparative Advantage vs. Absolute Advantage
- Watch this video about comparative advantage specialization of a country and the benefits from trading with other nations.
- Read this section, which covers the underlying meaning of the model of comparative advantage as it is used to analyze how countries as a whole deal with scarce resources.
- Watch this video about comparative advantage and absolute advantage and think about how a small country is still able to make the most of its scarce resources.
- Review this spreadsheet, which presents a hypothetical yet conceptually realistic illustration of the choices that countries face when exploring trade and productive specialization, and think about the questions it asks.
- Read this review of the concepts of absolute advantage, comparative advantage, and opportunity costs.