2 Key Assumptions in Economics People are rationally self-interestedThey seek to maximize their utility (happy points)People generally make decisions at the marginThey weigh the marginal benefit against the marginal cost of a decisionCeteris Paribus assumptionEconomists hold all other factors constant, except for what’s being considered
3 Basic Economic Vocabulary EconomicsThe study of choices people make to satisfy their needs and wantsMicroeconomicsThe study of how individuals and firms deal with scarcityMacroeconomicsThe study of how society as a whole deals with scarcity
4 Basic Economic Vocabulary GoodsPhysical objects that can be purchasedServicesActions or activities performed for a feeConsumersPeople who purchase goods and servicesProducersPeople who produce g/sPeople who supply goods and services
5 Needs Wants Necessities for survival Goods and services consumed beyond what is necessary for survival9/2/13
6 Resources / The Factors of Production Economists classify resources into 4 categoriesLandNatural resourcesThe payment for Land is RENTLaborHuman resourcesThe payment for Labor is WAGES
7 3. Capital (a product of Investment) Tools, machines, factoriesThe payment for Capital is INTEREST4. EntrepreneurshipRisk-taker producing a profitable combination of land, labor and capital in new ways in order to make profit.The payment for Entrepreneurship is PROFIT9/2/13
8 SCARCITYEconomics is the study of limited resources and unlimited needs and wantsScarcity leads to making choicesTrade-offs are faced when it comes to using available resources.Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”Every decision has an opportunity cost
9 SCARCITY Marginal decision making = the result of an additional change Marginal benefits vs. marginal costs is the basis for making the decisionExamples:1 more hour of sleep vs. eating breakfastPart time job vs. goofing offCollege vs. full time job
10 Opportunity CostOnce a resource or factor of production has been put to productive use an opportunity cost is incurred.Opportunity cost is the next best alternative use for a resource.Ex. If the 3 cups of flour are used to bake bread, then the opportunity cost is the cake that could also have been baked with the 3 cups of flour.No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.
11 There is no such thing as a free lunch. TINSTAAFLThere is no suchthing as a freelunch.Everything has a cost.
13 PPC The PPC = The Production Possibilities Curve The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.Illustrates scarcity, choices & opportunities costsPoints on the curve show production amounts possible for 2 goodsCapital goodsPoint AConsumer Goods
14 Production Possibilities Schedule GoodABCDCoconuts91530Fish402820(draw on board)9/2/13
15 Point A Y = Point Not Possible X = Point possible, but inefficient Capital GoodsPoint AY = Point Not PossibleConsumer GoodsX = Point possible,but inefficient
16 Review: SCARCITYEconomics is the study of limited resources and unlimited needs and wantsScarcity leads to making choicesOpportunity Cost is what is sacrificed when one choice is made over the “next best alternative”Every decision has an opportunity cost
17 Review: SCARCITYMarginal decision making = the result of an additional changeMarginal benefits vs. marginal costs is the basis for making the decisionExamples:1 more hour of sleep vs. eating breakfastPart time job vs. goofing offCollege vs. full time job
18 CAPITALISM – MARKET ECONOMY Ownership of all resources is in the hands of individualsDecision making is by individuals in the marketVoluntary exchange of goods and servicesSelf interest influences all decisions – to the benefit of societyCompetition is the regulating mechanism
19 CAPITALISM – MARKET ECONOMY Markets and Prices coordinate the millions of decisionsSystem is facilitated by:SpecializationUse of moneyTechnologyActive, but limited government involvement
20 CAPITALISM – MARKET ECONOMY Basic Questions every society must ask:What goods & services to produce?How to produce?How much to produce?For whom to produce?How will changes be implemented?
21 Agenda 9/5 Turn in HW Circular Flow Quiz Fast Food reading Test review/practice9/2/13