Basic Economic Concepts

Section 1 Module 1

The Study of Economics

THERE IS NO SUCH THING AS A FREE LUNCH

Basically, this means that there is a cost to everything. Even though someone might get something “free” someone else had to pay for it. Every worker involved in the process of production and distribution got paid along the way

Macro vs. Micro

Macroeconomics Concerned with the overall ups and downs of the economy Example How many people are employed in the economy as a whole?

Microeconomics How people make decisions and how those decisions interact Example Should I go to college or get a job after high school?

What is Economics?

The study of scarcity and choice

Scarcity: when resources are in short supply to satisfy all the various ways a society wants to use them. Individual Choice: the decision by an individual of what to do, which necessarily involves a decision of what not to do. Can you buy everything you want at Walmart? limited by:

money (budget) living space (where will I put this stuff?)

SCARCE

1. be limited in quantity

2. be desirable

3. have more than one valuable use

In order for something to be considered

scarce it must meet three criteria

Examples

6

OIL gasoline

Examples

7

WATER

Examples

8

trash

Incentives Rewards or punishments that motivate particular choices • Charging higher prices when there is a

shortage of something, thus keeping more profits

Establish ownership and grant individuals the right to trade goods and services with each other • Creates incentive to put resources to

their best possible use (example: lake)

Property Rights

Two Major Types of Economies

Market Economy

Decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement Example: United States, Japan

Command Economy

Industry is publicly owned and central authority (govt.) makes production and consumption decisions Example: Soviet Union, Cuba

Marginal Analysis Study of costs and benefits of doing a little bit more of an activity versus a little bit less

Marginal Benefit The gain of doing something one

more time

Marginal Cost The cost of doing something one

more time

If the marginal benefit of making another car, reading another page, or

buying another latte EXCEEDS the marginal cost, the activity should continue. Otherwise it should not

Resource

Anything that can be used to produce something else

a.k.a. Factors of Production

Factors of Production

1. Land: all resources that come from nature

(minerals, timber, petroleum)

Factors of Production

2. Capital: manufactured goods used to make other goods and services (machinery, manufacturing, tools)

Factors of Production

3. Labor: the effort of workers

(employees)

Factors of Production

4. Entrepreneur: individuals involved in risk taking, innovation, and the organization of resources for production

Richard Branson

Trade-Off and Opportunity Cost

Trade-Off: when you give up something in order to have something else Opportunity Cost: the real cost of an item: what you must give up in order to get it.

What to do on a Saturday night?

1. Go to the movies with friends

2. Go out on a hot date

3. Eat at your favorite restaurant with family

4. Stay at home and watch television

5. Study notes from your favorite class

PLAN A or PLAN B

Tale of Two Cities

PLAN A or another PLAN A

Mission Go to Senior Prom with that special someone Once in a lifetime

Dallas In the wedding of your favorite cousin Once in a lifetime?

Positive vs. Normative Economics

Positive Analysis that describes the way the economy actually works Definite right or wrong answers

Normative Makes prescriptions about the way the economy should work Subject to opinion

Toll roads

Cost-Benefit Analysis a decision-making process in which you compare what you will sacrifice and gain by a specific action

Taking parents car without

permission

Cheating on a test

Stealing money or merchandise from

your job

Practical Jokes

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