WHAT IS ECONOMICS?

Economic Reality  The Economic Myth – Economic choices involve only money.  Economic Reality – Economics focuses on choices, the choices that we make every day. Both as individuals and as a society.

 Economics – The study of how people choose to use scarce resources to satisfy their wants (and needs).  Scarcity – The Lack of enough resources to satisfy our wants – Human wants always outstrip the limited resources available to satisfy them. – These resources also have alternative uses – This is also referred to as the economic problem

 Opportunity Cost – Every time we make a decision there is a next best alternative not chosen, this is termed the opportunity cost. – When we choose we refuse, usually the things we choose from are positive.  Trade-offs – All choices that we have a cost versus benefit relationship. – Cost vs. benefit can change over time.

Production Possibilities Curve  A model used by economists to illustrate the impact of scarcity on the economy.

 Macroeconomics – The study of the behavior of the economy as a whole and how major economic sectors – such as industry and the government – interact.  Microeconomics – The study of specific factors in the economy, for example, price, costs, profit, competition and human behavior. – Microeconomics focuses on the behavior of individual players in an economy, especially what goes on in the market place.

 Normative Economics – The study of the way things ought to be in the economic world. – Should taxes be raised to pay for universal health care? – Will a tax cut for the rich stimulate a sluggish economy? – Will increased standards in education provide a better workforce?

 Positive Economics – The study of the way things are in the economic world. – The goal of positive economics is to increase knowledge of how the economy works by describing and explaining how economic behavior is, not how it should be.

 Utility – The benefit or satisfaction you derive from the use (choice) of a good or a service.  Total Utility – The maximum satisfaction or maximum benefit you can get from a choice that you make.

 Marginal Utility – The additional, or marginal, benefit derived from consuming a successive amount of something.  Law of Diminishing Marginal Utility – The marginal benefit from using each additional unit of something during a given time period will tend to decline as each is used.

 Value – A measure of worth, what people are willing to give up for something.  Voluntary Exchange – If trade is not voluntary it is not trade!

 Fair Trade – Any voluntary exchange from which both traders anticipate gain.  Involuntary Exchange – When force or coercion is used by one side in a trade, one side gains at the expense of the other. – Slavery, conscription etc.  **Value is created only through voluntary exchange**