What is Economics Economic Choices Scarcity a limited

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What is Economics

What is Economics

Economic Choices • Scarcity- a limited quantity of each given resource • Productive resources-

Economic Choices • Scarcity- a limited quantity of each given resource • Productive resources- productive resources are scarce, goods and services are scarce too • Economics-examines how people use scarce resources to satisfy their unlimited wants

Productive Resources • Human Resources • Labor • Entrepreneur • Natural Resources • Exhaustible

Productive Resources • Human Resources • Labor • Entrepreneur • Natural Resources • Exhaustible resources- coal and oil • Renewable resources- timber, river, livestock, sun • Capital goods • Tools, trucks, machines, computer • Human creations

Goods and Services • Goods- physical good • food, ipods, clothes • Services- intangible,

Goods and Services • Goods- physical good • food, ipods, clothes • Services- intangible, not physical • Movies, lessons, tax professional • No Free Lunch- all goods and services involve a cost to someone • Pollution • If resources were not scarce you could have an unlimited supply and there would be no cost

Economic Theory • Economic theory- simplification of economic reality to make predictions about the

Economic Theory • Economic theory- simplification of economic reality to make predictions about the world • Simplify the Problem • Simplifying assumption • All other things constant • Rational self-interest • Make best choices you can • Maximize benefit

Economic Theory • Everybody Uses Theories • Economists Tell Stories • Explain theories by

Economic Theory • Everybody Uses Theories • Economists Tell Stories • Explain theories by explaining how the economy works • Normative Versus Positive Statements • Focus on should versus does • Normative is should • Positive is does, economic reality

Marginal Analysis • Compare marginal cost with marginal benefit • Ex. Eating a chocolate

Marginal Analysis • Compare marginal cost with marginal benefit • Ex. Eating a chocolate cake costs 1000 calories, benefit is it tastes good • Marginal- incrementally, additional, extra • Choice requires time and information • Microeconomics- focuses on economic behavior of individuals and firms • Macroeconomics- focuses on the performance of the economy as a whole, especially the national economy

Market Participants • Four types of participants • • Household Product market Resource market

Market Participants • Four types of participants • • Household Product market Resource market Firms • Markets • Means by which buyers and sellers carry out exchange • Circular flow model

Opportunity cost • Opportunity cost- opportunity lost, value of alternative you passed up •

Opportunity cost • Opportunity cost- opportunity lost, value of alternative you passed up • Nothing better to do • No alternative more attractive • Estimate Opportunity Cost • Based on individual decision maker • “road not taken” • Opportunity Cost Varies • Depends on your alternatives • Ex. Less likely to study on Saturday than on Tuesday, there’s less to do

Choose among Alternatives • Calculate Opportunity Cost • Rational self interest to select most

Choose among Alternatives • Calculate Opportunity Cost • Rational self interest to select most valued alternative • Make choice based on limited info • Try to do best you can to limit regret of not doing alternative • Consider your time • Time is scarce • If he does one thing he cant do another • Ignore Sunk cost • Cost already incurred and cannot recover

The Opportunity Cost of College • Forgone Earnings • Money you could have earned

The Opportunity Cost of College • Forgone Earnings • Money you could have earned if you went to work over school • Direct Costs of College • Cost of tuition • Other College costs • Room and board • Books • Other-Things-Constant Assumption • Will you be happy in a blue color job vs white color • Do you hate school • Are you okay with forging salary for a higher one later