Introduction to Basic Concepts Economics Introduction to Basic Concepts

Economic perspective: An unique way of thinking about economic issues Scarcity and Choice Rational Behavior Marginal Thinking: Costs and Benefits One unit at a time

Why Study Economics? Economics for Citizenship Professional and Personal Application

Principles Are Derived At Two Levels: Macroeconomics: economy as a whole and its basic subdivisions such as government, business and households. Macro looks at totals or aggregates to examine the “big picture”. Microeconomics: looks at specific units or segments of the economy, a particular firm or household. Micro looks at the “trees not the forest”.

Economic Views POSITIVE economics collects and presents facts. It avoids value judgments—”just the facts, madam”! Positive economics concerns WHAT IS —what the economy is really like.

Economic Views cont. NORMATIVE economics involves value judgments about what the economy should be like or which policies are best. Normative economics embodies subjective feelings about WHAT OUGHT TO BE —examining the desirability of certain conditions or aspects of the economy.

Scarcity Unlimited wants v. Limited resources Considered the ‘basic economic problem’. Examples Time: study v. soccer game Money: vacation v. addition to home Shortage v. Scarcity

Trade-Offs & Opportunity Cost Choices lead to costs Trade-offs: choosing between alternative uses of a resource. Opportunity cost: loss of the next best alternative use for a resource. Production Possibility Curve: a graphical illustration of opportunity cost.

PPC’s Economic model of Trade-offs and Opportunity Costs; 4 basic assumptions: Efficiency: full employment and productive efficiency Fixed resources Fixed Technology Two ‘products’

PPC’s cont.

PPC for Pizza and Industrial Robots

The PPC

Optimal Output MB = MC

Present choices & Future outcomes

Strategies to expand the production possibilities frontier: Discover new land resources Increase population and/or loosen immigration policy Education & training Increase productivity/technology

PPC’ Practice problems 3 and 4 in your packet.

Absolute and Comparative Advantage

Determining Comparative Advantage Two methods: Output: same amount of resources, different output Input: differing amount of resource, same output

How do we calculate the advantage? Input Method: Item Produced ‘ O U I’ Opportunity Cost Output Method: Opportunity Cost ‘O O O’ Item Produced

Comparative Advantage Applications Directions: Answer the following questions for each problem. Does the Output vary or does the Input vary in this problem? Who has the absolute advantage for each product? Who has the Comparative advantage for the first product? Who has the comparative advantage for the second product? Within what range will the terms of trade be?

Comparative Advantage Problems Joy gives two haircuts or one perm in an hour. Susie gives three haircuts and two perms in an hour. B. Ana takes 30 min. to wash dishes or one hour to sweep the house. Joe takes 15 min. for dishes or 45 min. to sweep.

Comparative Advantage Problems C. George fixes sixteen flats or eight breaks per day. Amy fixes fourteen flats or eight breaks per day. D. Texans require 10 hours of labor per unit of beef produced and 30 hours of labor per unit of cotton produced. Virginians require 15 hour of labor per unit of beef and 40 hours of labor per unit of cotton.

Circular Flow Model