Economics Introduction

Alfred A. Knopf An economist is a man who states the obvious in terms of the incomprehensible.

Laurence J. Peter An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.

Adam Smith He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Microeconomics . . . a branch of economics that studies the behavior of individual households and firms in making decisions on the allocation of limited resources. . . . examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.

macroeconomics . . . a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. . . . includes national, regional, and global economies.

Objective to understand the costs and benefits involved in decision making to apply a production possibilities model to a complex national problem

The study of economics is . . .

Concepts Scarcity – Insufficiency of amount or supply; shortage: a scarcity of food that was caused by drought. Trade-Off – An exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable: "a fundamental trade-off between capitalist prosperity and economic security" (David A. Stockman). Opportunity Cost – the loss of potential gain from other alternatives when one alternative is chosen "idle cash balances represent an opportunity cost in terms of lost interest"

Scarcity

Trade-Off

Opportunity Cost

Summer vacation is around the corner. You have plans to relax, hang out in your neighborhood, and have some fun. Yesterday, you were talking to a friend who caused you to pause and reconsider. Your friend invited you to spend four days at the beach. Transportation would be included, but it would probably cost you about $60 each day for food and entertainment. This is not a bad deal, but you are saving for college and $240 will put a dent in your college fund. Next, your grandmother offered you a job painting her five-room house. She will pay you $300, but the job will take at least four days, and she wants you to start on the same day you might have left for the beach. What will you decide to do?

how might you choose to use your resources? Possibility One ? advantages ? opportunity cost? Possibility Two? Possibility Three?

choices Which option would be your preferred choice? Would your friends have made the same choice as you? Why or why not?

New Scenario A firm estimated that it would have to invest $500,000 in order to produce hand-held personal listening devices. Production costs would add another $200,000 per year. The firm estimates that it could sell about $225,000 worth of these devices each year. Would it pay the firm to manufacture the devices? Distinguish between the short-run and long-run. Discuss with your neighbor.

production possibilities curve . . . a graph that compares the production rates of two commodities that use the same fixed total of the factors of production. Graphically bounding the production set, the PPF curve shows the maximum specified production level of one commodity that results given the production level of the other.