1. The economic way of thinking
Chapter 1

2. Scarcity: the basic economic problem
Section 1

3. What is scarcity?
Wants – are desires that can be satisfied by consuming a good or a service
Needs – are things that are necessary for survival
Scarcity – exists when there are not enough resources to satisfy human wants. Scarcity is not a temporary shortage of some desired thing.
Economics is the study of how individuals and societies satisfy their unlimited wants with limited resources

4. The 2 principles
People have wants
Scarcity affects everyone

5. Scarcity leads to 3 economic questions
What will be produced?
How will it be produced?
For whom will it be produced?

6. What will be produced?
Society must decide the mix of goods and services it will produce.
Food, televisions, automobiles, computers?
What Natural resources do we have?
What do consumers want? Do we care what they want?
How much do we produce?

7. How will it be produced? What is the most efficient way?
Natural resources influence
Including how we use people
labor intensive farming or machinery

8. For whom will it be produced?
How much should people get?
Equal shares? Pay?
How should their share be delivered to them?
Trucks, cars, boats, highways, trains, airplanes, mule, magic?

9. Factors of production
Land – refers to all natural resources used to produce goods and services
Labor – is all of the human effort used to produce goods and services. It is not just physical work. (Doctors, Lawyers, ETC)
Capital is all of the resources made and used by people to produce goods and services
Entrepreneurship – involves the vision, skills, and risk-taking needed to create and run business.

10. Human Capital
Workers invest in human capital (The knowledge and skills gained though experience)
College degree
Job training
skills
When workers possess more human capital, they are more productive

11. Economic choice today: opportunity cost
Section 2

12. Key concepts
Incentive are methods used to encourage people to take certain actions.
Utility is the benefit or satisfaction received from using a good or service
Economize means to make decisions according to the best combination of costs and benefits.

13. Making choices Factor 1: Motivations for choice
Choice powers economy
What powers choice?
Incentives
Expected utility
Desire to economize
Guided by self-interest
Not that you behave selfishly!
Maximize utility
Factor 2: No free lunch
“there is no such thing as a free lunch.”
Every choice involves costs.
Money
Time
Or something else

14. Trade-offs and opportunity cost
Example 1 – making trade offs
Trade-off is the alternative people give up when they make a choice
Pizza or wings
Movie or studying
Job or hanging out with friends
Example 2 – counting the opportunity cost
Opportunity cost is the value of something that is given up to get something else that is wanted.
It is the value of the next best alternative
Jobs or hanging out with friends
Money or fun

15. Cost-benefit analysis
Is an approach that weighs the benefits of an action against its costs

16. Choice
Benefit
Opportunity Cost
One hour of study
D in Economics Class
One hour with friends
Two hours of study
C in Economics Class
Two hours with friends
Three hours of study
B in Economic Class
Three hours with friends
Four hours of study
B+ in Economic Class
Four hours with friends
Five Hours of study
A- in Economic Class
Five hours with friends
Six hours of study
A in Government Class
Six hours with friends
Seven hours of study
Seven hours with Friends

17. Marginal costs and benefits
Marginal cost is the additional cost of using one more unit of a product
Marginal benefit is the additional satisfaction from using one more unit of a product

18. Analyzing Production possibilities
Section 3

19. Key concepts
Economic model is a simplified representation of economic forces
Production possibilities curve is a graph used by economists to show the impact of scarcity on an economy.

20. Production possibilities curve (PPC) Assumptions
Resources are fixed
All resources are fully employed
Only two things can be produced
Technology is fixed

21. PPC
Bread
muffins 12 10 35 7 63 4 84
100

22. A = Here you are using all the ingredients to make only bread
B= combination
C= Here you are using all the ingredients to make muffins a
bread b c
muffins

23. What we learn from PPCs
Efficiency involves producing the maximum amount of goods and services possible
Underutilization means producing fewer goods and services than possible

24. a c guns b butter A = Any point on the curve represents efficiency
B= inside the curve is underutilization
C= outside the curve is a production impossibility. a c
guns b
butter

25. Some examples Opportunity cost Shift in the PPC Guns vs butter
Increase in opportunity cost – each additional unit costs more than the last.
Shift in the PPC

26. More resources or increased productivity shifts the PPC outward, or to the right, from PPC 1 to PPC2.
guns
PPC1
PPC2
butter

27. The economist’s toolbox
Section 4

28. Working with data Key concepts Using economic models
Statistics are information in numerical form
Using economic models
Based on assumptions and are simplified because thy focus on a limited number of variables. In some cases, models can help economists to predict future economic activity. The PPC is an example.
Using charts and tables
Using graphs

29. Microeconomics
Microeconomics is the study of individuals, families, and businesses in an economy.
Small
Units of study
Consumer markets, business markets, labor markets
Topics of interest
Markets, prices, costs, profits, competition, government regulation
Consumer behavior
Business behavior

30. Macroeconomics
Macroeconomics is the study of the economy as a whole and is concerned with large-scale economic activity.
Big
Units of study
Economic growth, Economic stability, International trade
Topics of interest
Money, banking, finance
Government taxing and spending policies
Employment and unemployment
inflation

31. Positive and normative economics
Positive economics studies economic behavior as it is
Normative economics involves judgments of what economic behavior ought to be
It goes beyond the facts to ask if actions are good.
Lottery proceeds for schools (Tickets are purchased by lower incomes)

32. Adam smith: Founder of modern economics
Wealth of nations
1776
Argued for free trade (Not mercantilism)
People behave in ways to satisfy economic self-interests
“Invisible hand”
Guides the market
produce too much? cut production
Produce too little? Make more
Want it in green? Make green
The invisible hand guides the market into balance