What is Economics

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 Natural Resources Capital goods 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, 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 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 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 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 Markets 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 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 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 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