What IS Economics?

Economics is the study of how people seek to satisfy their needs and wants by making choices.

What is a need? A need is

something necessary for survival. Examples:

What is a want? A want is an item

we desire but is not essential to survival. Examples:

What do we mean by opportunity cost?

When we decide to do something, one of the things we could have done is usually better than the others. This is the most likely option.

This second best thing is called the opportunity cost.

Opportunity cost In other words, you

could have slept in instead of coming to school today. You chose to come to school. The opportunity cost was sleeping in.

So if economics is the

study of how people seek to satisfy their needs and wants by making choices,

why do people need to make choices at all?

Scarcity

Scarcity Limited quantities

of resources to meet unlimited wants.

A limit is ALWAYS reached.

Scarcity always exists because our needs and wants are always greater than our resources.

Scarcity is not the same as shortage. A shortage is when producers cannot or

will not offer goods or services at current prices May be long term or short term, but will or

can end

Two important terms Goods

Physical objects that are sold

Services Actions or

activities that one person performs for another and is paid for

Resources –those things used to create goods and services They are also

called Factors of Production

Land Labor Capital

Physical Human

Land All natural

resources used to produce goods and services Includes the fertile

land itself and anything that comes from the land including such things as forests, minerals, and water

Labor The effort a

person devotes to a task for which he or she is paid

This person works for someone else – a company

Includes the people who are working or looking for work

Entrepreneur

Person who puts land, labor, and capital together, the factors of production, to create new goods and services

Physical Capital Also called capital

goods - Inventory

Buildings, equipment, and supplies needed to run a business

Physical capital can make us more productive Example: Washing dishes

for your family: man vs machine By hand: 21 meals per

week, 2 people working, 30 minutes per meal is 21 hours per week of work

A dishwasher costs $400 but now dishes take only 15 minutes per meal for one person, a savings of 15 ½ hours per week

Extra time15 ½ hours per week for other activitiesMore knowledgeBy learning to use a dishwasher family members become more able to use other appliances More productivityWith extra time and knowledge they can do extra chores or activities that will help the family

Human capital The knowledge

and skills a worker gains through education and experience

Cost What it takes to get or

do something (what you give up)

Benefit

What is gained when a choice is made

Incentives Things that get

people to do things

Can be monetary incentives

Or non-monetary incentives

Consequence

What happens when you make a choice

Trade-offs Trade-offs are all the

alternatives we give up whenever we choose one course of action over another.

Every decision we make involves trade-offs.

Trade-offs Individuals make

trade-offs but businesses also do.

Decisions made about land, labor, and capital involve trade-offs.

For example, if a farmer plants broccoli, he cannot plant corn.

Society and trade-offs Countries also make

decisions that involve trade-offs.

This is called guns or butter.

This means that materials used for military purposes are not available for domestic purposes.

Opportunity cost Remember: When

you make a decision, you give up something – this is the opportunity cost.

Or as an economist might say, “Choosing is refusing.”

Opportunity cost Some decisions are

easy but sometimes choosing between alternatives can be hard.

Margins But is a decision

always just all or nothing?

Instead of sleeping all day and not coming to school at all, what if you wanted to sleep five more minutes? What about an extra half hour?

This is called the margin.

Decision making at the margin Comparing the

opportunity cost and the benefits at the margin helps make good decisions.

At what point do the costs outweigh the benefits?

The margin is where you consider the cost of one more.

Thinking at the margin-using a grid can help make the best choiceOptions Benefit Opportunity

Cost

1st hour of extra study time

Grade of C on test

One hour of sleep

2nd hour of extra study time

Grade of B on test

Two hours of sleep

3rd hour of extra study time

Grade of B+ on test

Three hours of sleep

You could make an opportunity grid.

Alternative 1

Alternative Alternative 2 3

Benefits

Decision

Opportunity cost

Benefits given up (cost)

Thinking at the margin Deciding by thinking

at the margin is like any other decision

What will you sacrifice? What will you gain?

When the opportunity cost outweighs the gain, it’s time to stop.

One more thing…. TANSTAAFL

There ain’t no such thing as a free lunch!

Every choice has an opportunity cost!