Common Economic Concepts and Reasoning MT 1

Intro What is economics? Why study it? Do you get everything you ever want? Why not? Describe your perfect mate. From how they look to how they act, etc… How many people fit this description?

What the heck is economics? The study of the way people make decisions to satisfy what they want or need using their limited resources. Why is this important????????

Why do we have to make choices? 2 factors cause us to make choices Factor #1: SCARCITY BABY!!!!!!!!!!! Always Present There is a limited supply of natural resources and we have unlimited wants Which means no one can get everything they have ever wanted Factor #2:Shortages Only from time to time When producers will not or cannot produce the goods people want at current prices

Scarcity and Choice Human wants are unlimited, but resources are limited Therefore three basic questions must be answered in order to decide what to do with limited resources; What gets produced? How is it produced? Who gets what is produced?

Four Economic Resources (Factors of Production) Land Labor Capital Entrepreneurial ability

Land Includes natural resources such as timber, oil, coal, iron ore, soil, water, as well as the ground in which these resources are found Provides the site for factories, office buildings, shopping centers, homes, etc. Produces “rent” 2-6 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Labor The work and time for which one is paid is what economists call “labor” Money received for one’s labor is called wages and/or salaries About two-thirds of the total resource cost is the cost of labor

Capital Man-made goods used to produce other goods or services is what economists call “capital” Examples are office buildings, stores, and factories The money owners of “capital” receive is called “interest” Capital is the MOST important of the four economic resources

Entrepreneurial Ability The entrepreneur Sets up a business Assembles the needed resources Risks his/her own (or borrowed) money Makes a “profit” or incurs a “loss” Is central to the American economy 23 million businesses are virtually all entrepreneurs The vast majority work for themselves or have one or two employees

Why we have to make choices. Scarcity: There are limited natural resources to satisfy people’s unlimited wants. Every decision has a cost, not only to consumers, but to producers as well…

No such thing as a free lunch Due to scarcity, everything has a cost. Anything advertised for free, Is still not free!!!!!!

Scarcity and Choices (1.2) Think about the last purchase you made. What was the decision making process? Why did you not just buy what you wanted without even thinking about it? Was there something you lost out on because you decided to buy that good or service?

Decision Costs Consumer costs: Opportunity Costs: The cost of the next best alternative given up in a decision

Highest Valued Alternative Options Watch TV Talk on the telephone Go on a date Study economics The opportunity cost here is the highest valued alternative that could have been chosen (i.e., study economics) Choice made Highest valued alternative 2-12 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Inherit $40,000 Can’t go to college Bought the car Two choices – buy a car or go to college Bought the car (Paid $40,000) Can’t go to college College graduate (lifetime earnings) $1,300,000 High School graduate (lifetime earnings) $800,000 $ 500,000 Opportunity Cost 2-13 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

California 1967-1997 Prisons Colleges Added 21 additional prisons Colleges Added 1 additional college The Opportunity Cost of building more prisons is building fewer colleges 2-14 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

California 1990 - 1997 Prison guards College employees + 10,000 College employees - 10,000 Obviously, the opportunity cost of one additional prison is guard is one college employee 2-15 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Thinking at the Margin What type of benefit does one get for the opportunity cost? (Marginal Benefit) What is the opportunity cost for one additional unit of something? (Marginal Cost) Example: Work vs. Studying What is the benefit of working an extra hour? What is the benefit of studying an extra hour?

How do people choose? Take into consideration several factors: Is the item a want or a need? What trade-off is involved? What is the opportunity cost involved? What utility do I get from it?

Explanation How is a want different from a need? What is a trade-off? Have to have it to survive. (only 3) What is a trade-off? What you gave up to do what you did What is an opportunity cost? The cost of the most desirable alternative given up.

Need or want?

Need or Want?

3 Basic Economic Questions What to produce? Who to produce it for? How to produce it?

How to best use resources (MT 1.6) The frontier/economic growth Underutilized resources

Review Curve Anything inside of the graph represents resources not being used efficiently Cannot reach frontier without acquiring new resources. Can only be used to compare two goods (Opportunity costs) Used to see how to best utilize their resources in making the goods

Goods? What are those???? Any physical object that people have or want. Something tangible that can be held What is the difference between a good and a service? A service is an action or activity done by one person for another. Waitress, hairdresser, mechanic, etc…

Forms of goods Consumer Good Durable Good Capital Good Produced specifically for the consumer Durable Good Any good that lasts 3 or more years with regular use Capital Good Used to produce another good.

1.3 When you go to a store, what catches your attention that makes you want to purchase a good or service? If you are an employee, why makes you work hard for your boss, or job?

How do you entice someone to buy? (MT 1.3) Incentives: Monetary (extrinsic): Some kind of incentive money wise to get your attention Sales, Buy this get this free, save $50 if you buy so many… Non-Monetary (Intrinsic): You will be in style, you’ll be envied, you get the prettiest girl, et… Utility: The item must be useful to satisfy a want or a need. Ask yourself: “Is this something I will use?”