Basic Economic Concepts

Economics Scarcity Resources are Limited (Money, Time, “Stuff”) Wants are Unlimited (We want everything!) Economics is the study of how we allocate or distribute those scarce resources.

Factors of Production There are 2 types of things produced in our world: 1.) Goods – Tangible things (a bottle of Coke, a shirt, etc…) 2.) Services – Intangible things that benefit the buyer (a massage, haircut, visit to the Dr., etc…) These are the 4 types of “Resources” used to make any good or provide any service. Land Includes timber, water, minerals, and anything that comes from the land Labor The effort of workers Capital Machinery, buildings, tools, and anything used to make your product Entrepreneurship Risk taking, innovation, and the organization of resources for production

Positive vs. Normative There are 2 main types of reasoning that economists use Positive Analysis Predicts the consequences of actions. Asks the question(s) “What is?” and “What will be?” Normative Analysis Determines correct and incorrect choices based on a set of norms or ideals Asks the question “What ought to be?” Economists make predictions of possible decisions based on positive analysis. Citizens and policymakers then use those conclusions to make a normative decision.

Positive vs. Normative (cont.) DON’T WRITE!!! Positive Questions Normative Questions If the Gov’t increases the minimum wage, how many workers will lose their job? If 2 office-supply firms merge, will the price of office supplies increase? How does a college education affect a person’s productivity and earnings? How do consumers respond to a cut in income taxes? If a nation restricts shoe imports, who benefits and who bears the cost? Should the Gov’t increase the minimum wage? Should the Gov’t block the merger of 2 office-supply firms? Should the Gov’t subsidize a college education? Should the Gov’t cut taxes to stimulate the economy? Should the Gov’t restrict imports?

A Trade-off is any choice where one resource is traded for another. Trade-Offs Scarcity forces us to make a choice. Costs vs. Benefits Is the cost worth what I get out of it? We are then forced to make a Trade-off. We have to trade something to get something else. A Trade-off is any choice where one resource is traded for another.

Opportunity Cost Every decision has a cost, if you do one thing, you can’t do another thing. There is a cost to your opportunity. Opportunity Cost is the value of the next best option you had available. Scenario: You have tickets to the World Series to see the L.A. Dodgers play the N.Y. Yankees. The next day your friend tells you he got front row tickets to your favorite artist who is coming to Atlanta. They are happening at the same time…you have to choose! Opportunity Cost The value of what you had to give up. Cost is much more than the $ attached to that item.

Law of Economy Basic law derived from human actions If there are 2 things that are equally satisfying….people will choose the cheapest option. If there are 2 things that cost the same….people will choose the one which gives greater satisfaction.

Economic Assumptions Economic thinking is based on 4 main elements 1.) Use assumptions to simplify Try to focus on what really matters Sometimes a simplification is harmless….sometimes it isn’t! Planning a road trip using a map vs. planning a bicycle trip using the same map 2.) Isolate variables Economists isolate 2 variables and hold everything else constant 3.) Think at the margin Looks at how a small change in one variable will affect other things. Ex.) If a car dealer were to hire 1 more sales associate, how many more cars will the dealer sell? 4.) Rational people respond to incentives We assume that people are rational, meaning they act in their own self- interest. When the payoff, or benefit, from doing something, rational people will c hange their behavior to get the benefit.

Micro vs. Macro -- Economics Just like other fields, Economics is broken down into sub- groups Microeconomics Focuses on the choices made by individuals, households, and firms – the smaller part that makes up the Economy Macroeconomics Focuses on the Economy as a whole, its ups and downs, and how governments can affect the Economy.