1 C H A P T E R What Is Economics?

ECONOMICS The social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

ECONOMICS The social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.

WHY STUDY ECONOMICS Most __________ decisions involve economics. An understanding of economics and government are the keys to participatory citizenship. Learn analytical and observational skills that are important in the workplace. Business managers or owners need these skills and understanding. Make better financial decisions with your investments. Foundation for careers in accounting, business, finance, marketing, or public policy.

THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS... BUT LIMITED OR SCARCE RESOURCES!

GOODS & SERVICES PROVIDE... UTILITY

GOODS & SERVICES PROVIDE... UTILITY WANT

GOODS & SERVICES PROVIDE... UTILITY WANT vs. NEED

The Economic Way of Thinking Scarcity The world has limited resources. These resources are desirable. TINSTAAFL There is no such thing as a free lunch

The Three Fundamental Questions... ECONOMICS AT WORK The Three Fundamental Questions... What will be produced? How will the goods be produced? Who will get the goods and services?

ECONOMIC PRODUCTS Consumer Goods Capital Goods Services

Let’s see if you’re thinking like an economist yet Take the true/false quiz in your packet called Activity 1

FACTORS OF PRODUCTION

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR

SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEURIAL ABILITY

ENTREPRENEURIAL ABILITY Takes The Initiative Makes Strategic Business Decisions Innovator The Risk Bearer

RESOURCE PAYMENTS PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEUR RENT INTEREST WAGES PROFIT & LOSS

RESOURCES & SCARCITY Let’s illustrate this with a challenge. We need 4 teams. Group by seats.

CIRCULAR FLOW MODEL RESOURCE MARKET BUSINESSES HOUSEHOLDS PRODUCT

CIRCULAR FLOW MODEL RESOURCES INPUTS RESOURCE MARKET BUSINESSES HOUSEHOLDS PRODUCT MARKET

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCES INPUTS GOODS & MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCES INPUTS GOODS & MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCES INPUTS GOODS & MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCES INPUTS GOODS & MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

What is the difference between a Trade-Off and Opportunity Cost? The value of the next-highest valued alternative or the forgone cost. Trade-Off An exchange of one or more thing(s) in return for another.

What is the difference between a Trade-Off and Opportunity Cost? The cost of passing up the next best choice. Trade-Off An exchange of one or more thing(s) in return for another.

FRIDAY NIGHT OPTIONS Go out with friends Stay home and watch TV Go on a date Study economics Attend the basketball game The one we pick is our choice, the rest become Trade-offs. The “next best” alternative becomes the Opportunity Cost.

FRIDAY NIGHT OPTIONS Go out with friends The one we pick is our choice, the rest become Trade-offs. The “next best” alternative becomes the Opportunity Cost.

GO OUT ON A DATE The Opportunity Cost of going out on a date is what you’ve lost by not going out with friends. Excitement Fun Your decision was based on getting more utility on your date. That’s the “incentive”

ANY OTHER COSTS? Dating is expensive. Let’s say you spend $30. You could have spent that $30 on something else.

SO OUR OPPORTUNITY COST IS…? The lost fun you would have had with your friends. The cash you spent on your date.

The Economic Way of Thinking Marginal Analysis Comparing benefits and costs. Marginal – means “extra, additional, one more” Marginal Cost (MC) – What does it cost to go to the next level or to get one more item? Marginal Benefit (MB) – What pleasure or “utility” do you get out of the next level or item? Incentive Why do we act? We do it when MB is greater than or equal to MC.

Marginal Analysis Example Hours Econ Score Math Score 1 26 24 2 48 44 3 61 62 4 73 75 5 83 84 6 91 7 97 96 8 100

Full Employment Full Production Fixed Resources Fixed Technology PRODUCTION POSSIBILITIES Assumes... Full Employment Full Production Fixed Resources Fixed Technology Two Goods for example...

PIZZA Full Employment and Productive Efficiency Fixed Resources PRODUCTION POSSIBILITIES Assumes... A Consumer Good Full Employment and Productive Efficiency PIZZA Fixed Resources Fixed Technology Two Goods for example...

Full Employment and Productive Efficiency Fixed Resources PRODUCTION POSSIBILITIES A Capital Good Assumes... Full Employment and Productive Efficiency Robots Fixed Resources Fixed Technology Two Goods for example...

10,000 Robots 400,000 Pizzas for example... PRODUCTION POSSIBILITIES What if we could only produce ... 10,000 Robots or 400,000 Pizzas Using all of our resources, to get some pizza, we must give up some robots! for example...

in table form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands)

in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form (thousands) Robots Pizzas (hundred thousands)

in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form (thousands) Robots Pizzas (hundred thousands)

in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form (thousands) Robots Pizzas (hundred thousands)

in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form (thousands) Robots Pizzas (hundred thousands)

in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form (thousands) Robots Pizzas (hundred thousands)

in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4 (in hundred thousands) ROBOTS 10 9 7 4 0 (in thousands) graphical form (thousands) Robots Pizzas (hundred thousands)

Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient Robots (thousands) D Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

Limited Resources means a limited output... PRODUCTION POSSIBILITIES Limited Resources means a limited output... An economy must sacrifice some of product X to obtain more of product Y.

Law of Increasing Opportunity Cost Economic resources are not completely adaptable to other uses To make more of X it costs more and more of Y This makes the PPC: Bowed out from the origin Concave

Unemployment & Underemployment Shown by Point U PRODUCTION POSSIBILITIES Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Unemployment & Underemployment Shown by Point U More of either or both is possible U

Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Notes... Economic Growth Q Robots (thousands) Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 Unemployment & Underemployment Shown by Point U Increase in resource supplies Better resource quality Technological advances Capital Goods More of either or both is possible U

Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Economic Growth B’ C’ Robots (thousands) D’ E’ Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

Let’s work with Production Possibility Curves Open you course packet to Activity 1-2 and complete Parts A – D.