Understanding Economics Introduction: The Economic Problem

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?...

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.

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

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.

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

The Production Possibilities Frontier Production Possibilities Frontier Hamburgers Computers Pt. on Graph Production Possibilities Curve b c 10000a 9001b 6002c 03d03d03d03d Computers Hamburgers e f inefficient unattainable d 900 a

The Law of Increasing Costs Production Possibilities Curve 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?

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

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