Economics  The word economy comes from a Greek word for “one who manages a household.”  Economics is the study of how society manages its scarce resources. Resources: Factors of Production  Land (natural resources)  Labor (workers)  Kapital (factory, tools, equipment)  Entrepreneurship (risk, innovation)

Use Resources to Produce Goods & Services Use Resources to Produce Goods & Services  Why can’t we have all we want?  Available resources are limited.  Human wants/desires (needs) are boundless!  What do we call this?

Use Resources to Produce Goods & Services Use Resources to Produce Goods & Services  The management of society’s resources is important because….  Resources are SCARCE!  Resources are LIMITED!  Can’t have everything we want, desire (need)!  What to produce?  How to produce it?  Who gets it?

Economics & Scarcity

A Household / Economy Faces Many Decisions  Who will work?  What goods should be produced?  What resources should be used in production?  What prices should goods be sold for?  Import/Export?  Guns & Butter?

A Household / Economy Faces Many Decisions  How much education…who should get it?  How much military…who should get it  How much transportation…who should get it?  How much health care?  What type of health care?  Who should get it?  Who should pay for it?

Choose Between Alternatives  choices → TRADE-OFFS → forgone alternatives → OPPORTUNITY COST → CHOOSING is REFUSING! –Whether to study or go out on a date? –Whether to go to class or sleep in? –Whether to go to college or to work? –Adopt a new technology? –Perform an operation (heart by-pass, hip replacement)? –Develop a new drug (new, improved)? –Annual pelvic exam?  The opportunity cost of an item is what you give up.

There Is No Such Thing As A Free Lunch  The cost of something is what you give up. –Free ticket to a Dave Matthews concert? –Getting bumped from a flight? –Where to live, work, shop? –The war on terror? –Auto/financial industry bailout or economic stimulus? –Health care reform? –Where would you be if you weren’t here? CHOOSING is REFUSING!

Thinking On The Margin  Incremental adjustments –Stay open another hour? –Study one more hour for economics exam? –Eat one more slice of pizza? –How many years of college? –Additional medical care? –Adopt electronic information system? –Should we build a new hospital? –Should we save a life? CHOOSING is REFUSING!

Is Health Care Like Ice Cream?

Thinking On The Margin  In the news…..  Downsizing to a studio apartment in Minneapolis means Courtney Zintner’s living room is also her bedroom and her office, but she is saving more than $900 a month and has a shortened commute.

There is no such thing as a FREE LUNCH “What is YOUR solution?” “There are no solutions,” I said. “There are only trade-offs.” “The people DEMAND solutions!” she shot back angrily. I replied, “the people can demand square circles if they want. But that doesn't mean that they will get them.” Opportunity Cost!  Quote by Thomas Sowell…..

Markets: Choices/Rationing Back to Scarcity: What’s the Question? And what does opportunity cost have to do with it? Should we ration? Given that we MUST ration, what is the best mechanism?

Markets: Choices/Rationing Methods of Allocation  Command (force)  Random (lottery)  Age, beauty, height, skin color  First come – first serve  Share equally  Markets!  Prices! (S&D, willingness to pay, willingness to sell)

Markets: Choices/Rationing Methods of Allocation  random (lottery)  age, beauty, height, skin color  first come – first serve  share equally  auction  prices (willingness to pay)  Markets