Economics The study of decision-making and the use of limited resources in an attempt to fulfill unlimited wants.

Scarcity Exists whenever there is not enough of a resource to fulfill our wants. Limited and Desirable What isn’t scarce??????????

NOTHING IS FREE!!! Every choice requires a trade-off Explicit and/or Implicit Costs

Opportunity Cost The value of the best forgone alternative. What one gives up when deciding to do one thing over another.

Economic Models Simplified constructs used to simulate reality

Sunk Cost already incurred and cannot be recovered allowing sunk cost to influence decisions defies “rational choice”

Rational Choice Theory People act in self-interest People always choose the option that will bring the greatest perceived benefit or satisfaction

Incentives Rewards and penalties that influence our choices. “Carrots” and “Sticks”

3 Economic Questions

3 Economic Questions _______________ to produce

What?

What?

What? Factors of Production Land, Labor, Capital, Entrepreneurship

3 Economic Questions _______________ to produce

How to produce? Factors of Production Land, Labor, Capital, Entrepreneurship

Grab a Computer

3 Economic Questions WHAT HOW to produce FOR WHOM

3 Economic Questions WHAT HOW to produce FOR WHOM Who answers these questions?

3 Economic Questions COMMAND MARKET

Market or Command North Korea United States? free enterprise capitalism consumer sovereignty competition more efficient better quality profit motive government control government ownership no motivation no private property rights prices determined by s and d lack economic freedom

MARKET v. COMMAND MIXED COMMAND MARKET

Market v. Command Economies

Command Elements of US Economy

Micro versus Macro Positive versus Normative

Production Possibilities Frontier A B C

Advantage and Specialization Absolute Advantage- best at production Comparative Advantage- produces at the lowest opportunity cost Specialization- based on comparative advantage

Circular Flow Model flow of expenditures and incomes

Circular Flow to Know Shows flow of expenditures and incomes Market- where buyers and seller meet Factors of Production- L,L,C,E Goods/Product Market v. Factors Market Largest Sector based on GDP

Major Topics Basic Terms Market v. Command PPF Comparative Advantage Factors of Production Circular Flow Model