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

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

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

4. 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.

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

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

7. GOODS & SERVICES PROVIDE...
UTILITY

8. GOODS & SERVICES PROVIDE...
UTILITY
WANT

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

10. 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

11. 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?

12. ECONOMIC PRODUCTS
Consumer Goods
Capital Goods
Services

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

14. FACTORS OF PRODUCTION

15. SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND

16. SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL

17. SCARCE RESOURCES
ECONOMIC RESOURCES
PROPERTY RESOURCES
LAND
CAPITAL

18. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL
HUMAN RESOURCES

19. SCARCE RESOURCES ECONOMIC RESOURCES PROPERTY RESOURCES LAND CAPITAL
HUMAN RESOURCES
LABOR

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

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

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

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

24. CIRCULAR FLOW MODEL RESOURCE MARKET BUSINESSES HOUSEHOLDS PRODUCT

25. CIRCULAR FLOW MODEL RESOURCES INPUTS RESOURCE MARKET BUSINESSES
HOUSEHOLDS
PRODUCT
MARKET

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

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

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

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

30. 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.

31. 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.

32. 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.

33. 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.

34. 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”

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

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

37. 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.

38. 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

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

40. 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...

41. 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...

42. 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...

43. in table form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)

44. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

45. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

46. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

47. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

48. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

49. in table form graphical form PRODUCTION POSSIBILITIES PIZZA 0 1 2 3 4
(in hundred thousands)
ROBOTS
(in thousands)
graphical form
(thousands)
Robots
Pizzas (hundred thousands)

50. 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
Pizzas (hundred thousands)

51. 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.

52. 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

53. 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
Unemployment &
Underemployment
Shown by Point U
More of either or
both is possible U

54. 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
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

55. 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
Pizzas (hundred thousands)

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