1. Fundamental Economic Concepts -Scarcity, Choice, Opportunity Cost, Marginal Analysis Fundamental Economic Concepts -Scarcity, Choice, Opportunity Cost, Marginal Analysis (1-A,F)

2. 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? 2

3. What is Economics? - The study of mankind’s unlimited desires in a world of limited resources. - Economics is the science of scarcity -Since we are unable to have everything we desire, we must make CHOICES on how we will use our resources. In economics we study the choices of individuals, firms, and governments Microeconomics deals with individual decisions, Macroeconomics looks at the economy as a whole

4. 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? Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics. These theories are then applied to fix problems or meet economic goals. This is called policy economics. Copyright ACDC Leadership 2015 4

5. 5 Key Economic Assumptions 1. Society has unlimited wants and limited resources (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. Copyright ACDC Leadership 2015 5

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10. What is the Economy?

11. Why Do We Study It? 1. Description 2. Analysis 3. Explanation 4. Prediction What? or How Much? How? or Why? When? OR…

12. Why do we study Economics? So we don’t get screwed.

13. Book Auction What economic concepts were demonstrated by the book auction? ◦ Scarcity ◦ Value ◦ Choices ◦ Rationing ◦ Equity vs. Efficiency  Which was the sealed auction? ◦ Consumer surplus } Stay Tuned!

14. Scarcity Situation that occurs when wants are greater than available resources. Scarcity is the fundamental problem in economics.

17. In this classroom, is/are _________ scarce? Desks? Water? Books? Gasoline? Jolly Ranchers? … Good looking economics instructors? But not in the hallway… Wants are satisfied by available resources No want for it in classroom, but outside… yes Wants exceed available resources

18. Good looking economics instructors?

19. We always assume…. People make decisions based upon RATIONAL SELF-INTEREST

20. We must consider… Examples: Shelter is a need, a mansion is a want. Food is a need, a large pizza is a want.

21. Utility The satisfaction that consumption of a good or service provides

22. DIMINISHING MARGINAL UTILITY As you consume additional units of a good, at some point each additional unit will begin providing less utility than the one before it.

23. Cost – Benefit Analysis Question? : What do you want RIGHT NOW?

24. Cost – Benefit Analysis Follow up question? : Why don’t you go get it?

25. Cost – Benefit Analysis We all make decisions in our own self-interest All decisions come with certain trade-offs and alternatives THERE IS NO SUCH THING AS A FREE LUNCH!!! SeinfeldSeinfeld example Opportunity Cost: the next-best alternative given up when making a choice What is the opportunity cost of going to college?

26. Opportunity Cost VS.

27. 2008 Audit Exam

28. Marginal Cost Marginal = Additional, next Additional cost vs. additional benefit We constantly engage in marginal analysis

29. Marginal Analysis Marginal analysis (aka: thinking on the margin) making decisions based on increments Example: When you decide to go to the mall you consider the additional benefit and the additional cost (your opportunity cost). Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends. Since your marginal benefits and costs can quickly change your analyzing them every second. What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost Copyright ACDC Leadership 2015 29

30. 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 3 rd time. Thinking at the Margin # Times Watching Movie BenefitCost 1st$30$10 2nd$15$10 3rd$5$10 Total$50$30 Copyright ACDC Leadership 2015 30

32. Turn to a partner and share a recent example of marginal thinking in your life.

33. Economic Terminology Utility = Marginal = Satisfaction! Additional! Allocate =Distribute! 33 Copyright ACDC Leadership 2015

34. Paradox of Value Water vs. Diamonds Monetary Value ◦ Must be scarce ◦ Must give utility Are diamonds scarce? Do they give utility? Conspicuous consumption ◦ Examples?