1. 251FINA Chapter One Dr. Heitham Al-Hajieh

2. Definition of economics
the study of how individuals and societies use limited resources to satisfy unlimited wants.

3. Fundamental economic problem
scarcity.
individuals and societies must choose among available alternatives.

4. Economic resources land labor capital entrepreneurial ability
natural resources, the “free gifts of nature”
labor
the contribution of human beings
capital
plant and equipment
this differs from “financial capital”
entrepreneurial ability

5. Resource payments Economic Resource Resource payment land rent
labor wages
capital interest
entrepreneurial ability profit

6. Rational self-interest
individuals select the choices that make them happiest, given the information available at the time of a decision.
self-interest vs. selfishness

7. Positive and normative analysis
positive economics
attempt to describe how the economy functions
relies on testable hypotheses
normative economics
relies on value judgements to evaluate or recommend alternative policies.

8. Economic methodology scientific method observe a phenomenon,
make simplifying assumptions and formulate a hypothesis,
generate predictions, and
test the hypothesis.

9. Simplifying assumptions
ceteris paribus – holding everything else constant
abstraction in economics
used to simplify reality

10. Microeconomics vs. macroeconomics
microeconomics - the study of individual economic agents and individual markets
macroeconomics - the study of economic aggregates

11. Scarcity
Economics is the study of how individuals and economies deal with the fundamental problem of scarcity.
As a result of scarcity, individuals and societies must make choices among competing alternatives.

12. Opportunity Cost
The opportunity cost of any alternative is defined as the cost of not selecting the "next-best" alternative.
Example: Suppose that you own a building that is worth $100,000 today and is expected to be worth $100,000 one year from today. If the interest rate is 10%, what is the opportunity cost of using this building for one year?

13. Example II The opportunity cost of college attendance includes:
the cost of tuition, books, and supplies,
foregone income (this is usually the largest cost associated with college attendance), and
What about room and board?

14. Example III: Opportunity cost of attending a movie:
opportunity cost of tickets
opportunity cost of time