Lecture 1 Chapter 1: What Economics is about; Appendix A Naveen Abedin 1

 Goods and Bads  Factors of Production  Scarcity  Opportunity Cost  Marginal Analyses  Efficiency  Exchange and Trade  Economic categories  Two-variable diagrams Naveen Abedin 2

 Goods: Anything that gives a person utility of satisfaction, which can be tangible (a book, food) or intangible (friendship, love)  Bads: Something that gives a persons disutility (dissatisfaction), such as being ill, pollution Naveen Abedin 3

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 Factors of production/inputs are the resources used in the production process in order to produce outputs.  There are four categories of factors of production: 1. Land/Natural resources: minerals, water, oil, forests, animals 2. Labor: It is the physical and mental contributions made by workers towards the production process. There are two types of labor – skilled (educated, white-collared workers) and unskilled (uneducated/poorly educated, blue-collared workers) Naveen Abedin 5

3. Capital: consists of produced goods that can be used as inputs for further production, e.g. machinery, equipment, tools. 4. Entrepreneur: Some people who have the skills to combine the three factors of production – land, labor and capital – to produce final goods. Payments made to factors of production:  Land – rent  Labor – wages  Capital – interest  Entrepreneur – profit Naveen Abedin 6

 Scarcity is a condition in which our wants (for goods) are greater than the limited resources (land, labor, capital and entrepreneurship) available to satisfy those wants. It is the fundamental economic problem of having seemingly unlimited wants in a world of limited resources. Hence, scarcity involves making a sacrifice, i.e. giving something up in order to obtain more of what is wanted. Naveen Abedin 7

 Choices: People have to make choices because of scarcity. Since there are limited resources and unlimited wants, some of our desires must go unfulfilled. E.g. should I go shopping or should I go to the movies?  Need for a rationing device: Determines who gets what: If people have infinite wants for limited resources to produce goods, then a rationing device must be used to decide who gets from the available quantity of goods, e.g. money – the more you pay, the more you get. Naveen Abedin 8

 Competition: If there were enough resources in the world to fulfill all demands, i.e. no scarcity, then there would be no competition. People also compete to get more of the rationing device Naveen Abedin 9

 Opportunity cost of a choice is the value of the best alternative forgone, in a situation where a choice needs to be made between several separate options, due to limited resources.  It is the “cost” incurred of not enjoying the benefit you would have gained from the alternative option you have forfeited. Naveen Abedin 10

 After you graduate, you have decided to accept a position working at the Bureau of Labor Statistics for TK. 33,000/month. The other offers you received were TK. 22,000/month, TK /month and TK /month. What is the opportunity cost of accepting the position at the Bureau of Labor Statistics? Naveen Abedin 11

Opportunity cost relating to behavior: From the book: Scenario 1: Student has a job offer of $8/hr. Opportunity cost of attending class is value, forgone from taking the job, $8/hr Scenario 2: Receives another job offer of $70/hr. Opportunity cost of attending class is value forgone from taking the new job, $70/hr The higher the opportunity cost of doing something, the less likely it will be done. Naveen Abedin 12

 Economists evaluate decisions through a cost-benefit analysis. The cost-benefit principle says that you should take an action if and only if, the extra benefit from taking the action is greater than the extra cost. Naveen Abedin 13

 Definition of margin in economics: additional  Marginal benefit (MB) is the benefit from each additional increment or unit  Marginal cost (MC) is the cost from each additional increment or unit  If MB > MC, then you consume the additional unit. Naveen Abedin 14

In a hot summer day, the first glass of ice- cold lemonade quenched your thirst, but the second glass may not be as strongly effective as the first glass. additional benefits of an additional glass of lemonade versus additional costs of an additional glass of lemonade Class exercise: Chicken burger lunch; study time Naveen Abedin 15

 We usually think in marginal terms rather than total terms because the benefits and costs of an additional unit are independent from the benefits you have gained and costs you have incurred from consuming the previous units. Naveen Abedin 16

 Consume till the marginal benefit from consuming the additional unit is equal to the marginal cost from consuming the additional unit – this is known as the optimal or efficient amount. Naveen Abedin 17 Number of burgers Marginal Benefit (hunger satisfaction) Marginal Cost (health risks)

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 Exchange or trade is process of giving up one thing for something else. It is the economic behavior that involves exchanging one scarce resource for another.  Exchange or trade only occurs when each person gives up something he or she values less for something he or she values more. Naveen Abedin 19

 Positive economics: Objective and fact based – attempts to determine what is. You must be able to test, prove or disprove positive statements. E.g. government provided healthcare increases public expenditures  Normative economics: subjective and value based – addresses what should be. Since normative statements are opinion based, they cannot be proved or disproved. E.g. government should provide basic healthcare to all citizens. Naveen Abedin 20

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 Independent Relationships Naveen Abedin 23