1. Understanding Economics Introduction: The Economic Problem

2. The Economic Problem How is being here today an example of economic opportunity cost(s)?..... What is the marginal utility of getting a diploma/degree? MA? Ph.D?...

3. Economics Defined: Economics is the social study of how to distribute scarce resources among competing ends. From yesterday’s intro: - Microeconomics focuses on individual consumers and businesses. - Macroeconomics takes a broad view of the economy.

4. The Economic Problem Economic agents must continually make choices. - Their wants are unlimited. - They face a limited supply of economic resources.

5. Economic Choice:  Economists assume that economic decision-makers maximize their own utility. - Decision-makers must keep in mind the opportunity cost of each alternative. - Opportunity cost is defined as the utility of the best forgone alternative - Opportunity cost is defined as the utility of the best forgone alternative.

7. The Production Possibilities Frontier  The production possibilities model is based on three assumptions: - …an economy makes only two products - …resources and technology are fixed - …all resources are employed to their fullest capacity

8. The Production Possibilities Frontier Production Possibilities Frontier Hamburgers Computers Pt. on Graph Production Possibilities Curve 0 1 2 3 1000 600 b c 10000a 9001b 6002c 03d03d03d03d Computers Hamburgers e f inefficient unattainable d 900 a

9. The Law of Increasing Costs Production Possibilities Curve 0 1 2 3 1000 600 Computers Computers Hamburgers As the quantity of computers rises, so does their opportunity cost. a b 900 c d Production Possibilities Frontier Hamburgers Computers Pt. on Graph 10000a 9001b 6002c 03d03d03d03d Opportunity Cost per additional unit?

10. Shifts in Production Possibilities Production Possibilities Curve 0 3 1000 Computers Hamburgers With more computers, the curve shifts out in the next period.

11. The Founder of Modern Economics Adam Smith: - Explained how the division of labour increases production… - Argued that self interest is transformed by the invisible hand of competition so that it creates significant economic benefits … - Stressed the principle of laissez faire, which means that governments should not intervene in economic activity