Basic Economic Concepts

• Module 1: The Study of Economics
• Module 2: The Production Possibility Frontier Model
• Module 3: Comparative Advantage and Trade

ANY GIVEN SUNDAY

It’s Sunday afternoon in the spring of 2013, and Route 1 in central New Jersey is a busy place. Thousands of people crowd the shopping malls that line the road for 20 miles, all the way from Trenton to New Brunswick. Most of the shoppers are cheerful—and why not? The stores in those malls offer an extraordinary range of choice; you can buy everything from sophisticated electronic equipment to fashionable clothes to organic carrots. There are probably 100,000 distinct items available along that stretch of road. And most of these items are not luxury goods that only the rich can afford; they are products that millions of Americans can and do purchase every day.

The scene along Route 1 on this spring day is, of course, perfectly ordinary—very much like the scene along hundreds of other stretches of road, all across America, that same afternoon. And the discipline of economics is mainly concerned with ordinary things. As the great nineteenth-century economist Alfred Marshall put it, economics is “a study of mankind in the ordinary business of life.”

What can economics say about this “ordinary business”? Quite a lot, it turns out. What we’ll see in this book is that even familiar scenes of economic life pose some very important questions—questions that economics can help answer. Among these questions are:

• How does our economic system work? That is, how does it manage to deliver the goods?
• How is the performance of the economy as a whole measured?
• Why are there ups and downs in the economy? That is, why does the economy sometimes have a “bad year”?
• Finally, why is the long run mainly a story of ups rather than downs? That is, why has America, along with other advanced nations, become so much richer over time?

In this section we discuss the study of economics and the difference between microeconomics and macroeconomics. We also introduce the major topics within macroeconomics and the use of models to study the macroeconomy. Finally, we present the production possibility frontier model and use it to understand basic economic activity, including trade between two economies.