Economics: An Introduction.

What is microEconomics? Microeconomics is the study of how to allocate scarce resources among competing needs. There is not enough of everything that people want (and need) to go around.

How do economists think? SCARCITY – refers to the condition that arises because society does not have enough resources to produce or that there is a limited quantity of almost all the things people would like to have. These things are called GOODS. Goods are any items that are desired by people. Most goods are available in scarce quantities.

SCARCITY

There is No Such Thing as a Free Lunch A. Resources are limited, but human desires are UNLIMITED… B. This is called SCARCITY… C. Scarcity ALWAYS exists. D. Because of scarcity, EVERYTHING you do has a cost… E. Even if that action seems to be “free”… What might be a “cost” of taking a walk in the park?

The Concept of “Free” in Politics Politicians often talk about FREE stuff: Free healthcare… Free education… Free housing for the poor… But these things are NEVER free…

Opportunity Cost Because of scarcity, everybody is forced to make trade-offs…The sacrifice of one thing in order to have another. The cost of the trade-off is called the opportunity cost—The value of the SECOND BEST option you did not take. This Sunday you might choose between…church, sleep, watching football, doing homework, working… You can’t do everything, so you have to make a choice.

Phil has $100. He can buy either a pair of shoes or a new cell phone Phil has $100. He can buy either a pair of shoes or a new cell phone. Phil chooses the cell phone. What is his opportunity cost? iRespond Question F Multiple Choice A.) The $100 he spent B.) The cell phone C.) The shoes D.) E.)

Why Are You Here? You could be working RIGHT NOW!!! But right now, you are making NO MONEY AT ALL!!! Minimum wage is now $7.25…but you might even get a job—RIGHT NOW—for more than that!!! Let’s say, $10 an hour… $10 an hour, 8 hours per day, $80 bucks a day, $400 bucks a week… This semester lasts for 18 weeks… What is your opportunity cost for choosing to stay in school?

$7,200

But Wait! High school dropouts earn, on average, $910,000 in their lifetime… Graduates earn $1.2 million… So, the opportunity cost of dropping out is $290,000. And those with four-year degrees earn $2.1 million… So the opportunity cost of not going to college is $900,000. Those with master’s degrees earn $2.5 million… And those with professional degrees earn $4.4 million.

Marginal Analysis Is a decision-making process wherein people make choices that HOPEFULLY result in benefits that are EQUAL TO or GREATER THAN their costs. The Marginal Cost ( Consequence) of staying in school is $7200. The Marginal Benefit (Reward) is a much higher level of earning power throughout the rest of your life.

Incentives: The Key to Economics All of economics rests on this principle…. Incentive: the hope for a reward or the fear of a punishment. There are TWO types of incentives… Positive incentives… And negative incentives. A positive incentive is a REWARD… And a negative incentive is a PUNISHMENT.

incentives

Three Key Economic Questions Because resources are limited, every society must answer these three questions: What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

HOW DO ECONOMISTS THINK? Utility & rationale Economists assume that people act to maximize their own happiness This does not mean people are greedy – some people get happiness from others’ happiness This happiness that economists assume people maximize is called UTILITY. We also assume people act rationally

How do economists think - resources The reason that there is scarcity of goods(and services) is that there is scarcity of resources that are used to make THOSE goods. Resources are all the raw elements that go into the production of a good or service.

Factors of Production Factors of Production—the resources that are used to make all goods and services. There are three: Land—natural resources used to produce goods and services (coal, water, lumber)… Labor—the effort a person devotes to a task… Capital—any human made resource that is used to produce other goods and services. There are two types of capital: …Physical Capital, and… …Human Capital.

Types of Capital Physical Capital—Human-made objects that are used to create other goods and services… Such as—tools, factories…what else? Human Capital—the knowledge and skills a worker gains through education and experience. The economy must have both types of capital to grow.

Which of the following is an example of physical capital? iRespond Question F Multiple Choice A.) A box of nails. B.) A gallon of gas. C.) An oven used to cook pizza. D.) A worker on an assembly line. E.)

F Multiple Choice iRespond Question Dr. Doolittle spends $10,000 for his assistant to become certified on new medical technology equipment. Which of the productive resources is Dr. Doolittle investing in? A.) Land B.) Labor C.) Capital D.) Entrepreneurship E.)

Putting the Factors Together: Entrepreneurs—ambitious leaders who combine land, labor and capital to create and market new goods and services. They develop new ideas, start businesses, create new industries and are critical for economic growth to occur.

What is Money? A medium of exchange—the “barter system” is inefficient. A unit of account—value is measured in terms of money. A store of value—it can be saved for months or years and then retrieved.

What is money?