Welcome to BAUD 200 Economic Foundation for Business

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ECONOMICS Economics Is a Science That Analyzes How Individuals Behave, in a World of Scarcity.

Construction of Theory AbstractionsDefinitionsAssumptionsImplications Adoption of Theory

A Good Is Anything, That an Individual Wants to Have More Of, at Zero Price. Anything : Material or Non-material An individual wants Have More of At Zero Price

Resource: Anything that can be used to produce Goods. Land = all its attributes Labor = People Capital = Buildings & Equipment

Assumptions Humankind has unlimited wants Our resources are limited Scarcity : Individually, and as a Society, we do not have enough resources to produce all the things we want.

Implications of Scarcity Choice: people must choose which goods to acquire. Economic Cost: The Cost of any action, is the personal value of the next highest valued alternative given-up. Competition: We are in a state of competition for the use of resources

Forms of Competition in Society Violence, or Threat of Violence Social/Political : competition on the basis of some limited behavior or characteristic Economic/Market: competition based on offering the highest value in exchange.

Primary Social Goal = Fairness Violence: not fair. Social political: not fair. Economic: not fair, Life is NOT FAIR !! But, the market offers the broadest and most fair system

What Economics Is About Microeconomics: decisions of individuals and firms: what to buy and what to produce. Macroeconomics: the whole economic system and the role of government.

Mechanisms of Choice Political: our representatives make choices Economic/market: individuals and firms make choices based on relative prices about what to produce

Ten Principles of Economics Individual decision making How people interact The economy as a whole

Individual Decision Making People Face Trade-offs: Choice Opportunity Cost Rational people think at the margins People respond to incentives

How People Interact Trade Makes everyone better off The market system organizes production efficiently Markets outcomes can sometimes be improved upon by Government

The Economy as a Whole The standard of living depends on productivity Inflation results from too much Money The short-run trade-off: inflation vrs. unemployment

Product Markets FIRMSHOUSEHOLD Resource Markets $'s$'s Revenue $'s Income $'s Goods & Services Goods & Services Resources Inputs Circular Flow Diagram of the Exchange Economy

Circular Flow Diagram of the Exchange Economy (p23) Households: Decisions: What to sell? What to buy? Assume Maximize Utility Firms: Decisions: What inputs to use? What to produce? Assume Maximize Profits. Markets: Factor Markets, Product Markets Role of Money: The medium of exchange

Scarcity  Society Choices What to produce? Goal find the mixture of outputs that maximizes society’s value. How to produce? Goal: find the optimal mix of inputs to maximize technical output. For whom to produce? Who will get to consume the goods produced.