Economics““Econ, Econ, Econ”Econ”

EconEcon

Introduction to Economics

I WON THE LOTTERY!I’ll give you anything you want other than money.

What do you want? Would your list ever end?

Why not?Scarcity!!!

What is Economics?

Economics is the study of choices

• Economics is the science of scarcity.

• Scarcity means that we have unlimited wants but limited resources.

• Since we are unable to have everything we desire, we must make choices on how we will use our resources.

In economics we will study the choices of individuals, firms, and governments.

Textbook DefinitionEconomics- Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants.

(Study of how individuals and societies deal with ________)

Examples:

You must choose between buying jeans or buying shoes.Businesses must choose how many people to hireGovernments must choose how much to spend on welfare.

scarcity

Micro vs. MacroMICROeconomics-

Study of small economic units such as individuals, firms, and industries (ex: supply and demand in specific markets, production costs, labor markets, etc.)

MACROeconomics-Study of the large economy as a whole or economic aggregates (ex: economic growth, government spending, inflation, unemployment, international trade etc.)

Definitions• Needs: Food, Shelter, Clothing• Wants: anything desired that’s not a need• Goods: physical objects like clothes or shoes• Services: actions or activities one person does for

another• Entrepreneur: person that starts a business• Shortages: producers will not or cannot offer goods

or services at current prices

Unlimited Needs &

wants

Limited Resource

s

Scarcity

CHOICES

What to produce?

How to produce?

For whom to produce?

Positive vs. Normative Positive Statements- Based on facts. Avoids value judgements (what is).Normative Statements- Includes value judgements (what ought to be).

How is Economics used? •.

5 Key Economic Assumptions1. Society’s wants are unlimited, but ALL resources

are limited (scarcity).

2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off).

3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”

4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.

5. Real-life situations can be explained and analyzed through simplified models and graphs.

Would you see the movie three times?Notice that the total benefit is more than the

total cost but you would NOT watch the movie the 3rd time.

Thinking at the Margin

# Times Watching Movie

Benefit Cost

1st $30 $10

2nd $15 $10

3rd $5 $10

Total $50 $30

Marginal AnalysisIn economics the term marginal = additional

“Thinking on the margin”, or MARGINAL ANALYSIS involves making decisions based on the additional benefit vs. the additional cost.

For Example:You have been shopping at the mall for a half hour, the additional benefit of shopping for an additional half-hour might outweigh the additional cost (the opportunity cost). After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.

The MARGINAL ANALYSIS approach to decision making is more useful used than the “all

or nothing” approach.

Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home”

In reality the decision making process started with “should I go to the mall at all.” Once you are there you thought “should I stay for an additional half hour or should I go.”

Marginal Analysis

The MARGINAL ANALYSIS approach to decision making is more comely used than the “all

or nothing” approach.

Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home”

In reality the decision making process started with “should I go to the mall at all.” Once you are there you thought “should I stay for an additional half hour or should I go.”

Marginal Analysis

You will continue to do something until the

marginal cost outweighs the marginal

benefit.

All Resources are Scarce!

Graphs

Scarcity

Analyzing Choices

Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)…

1. You want to visit your friend for a week2. You work every weekday earning $100 per day3. You have three flights to choose from:

Thursday Night Flight = $275Friday Early Morning Flight = $300

Friday Night Flight = $325

Which flight should you choose? Why?

Trade-offs and Opportunity CostALL decisions involve trade-offs.

The most desirable alternative given up as a result of a decision is known as opportunity cost.

Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.

(Examples: going to the movies)

What are trade-offs of deciding to go to college? What is the opportunity cost of going to college?

GEICO assumes you understand opportunity cost. Why?

Econ in the Movies

The 4 Factors of Production

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The Four Factors of Production

Entrepreneurship

Capital

Labor

Land

•Producing goods and services requires the use of resources- DUH!. •ALL resources can be classified as one of the following four factors of production:

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Land = All natural resources that are used to produce goods and services. Anything that comes from “mother nature.” (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.)

The Four Factors of Production

Labor = Any effort a person devotes to a task for which that person is paid. (manual laborers, lawyers, doctors, teachers, waiters, etc.)

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Two Types of Capital: 1. Physical Capital- Any human-made resource that is used to create other

goods and services (tools, tractors, machinery, buildings, factories, etc.)2. Human Capital- Any skills or knowledge gained by a worker through

education and experience (college degrees, vocational training, etc.)

The Four Factors of Production

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Program for International Student Assessment (PISA) is a worldwide evaluation of 15-year-old school children's scholastic performance

• Entrepreneurship= ambitious leaders that combine the other factors of production to create goods and services.

• Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc.

The Four Factors of Production

Entrepreneurs:1. Take The Initiative2. Innovate3. Act as the Risk Bearers

So they can obtain _________.

Profit= Revenue - Costs

PROFIT

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The Factors of Production

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Video QuestionsWat

• What are some of the factors of production for CD NOW? *these are from the beginning, when they started their business.

• How did the factors of production change for CD Now in their first five years of business? these are from the middle/end, when they were more successful.