1. Basic Economic Concepts

2. What is Economics in General?
Economics is the science of scarcity.
Scarcity is the condition in which our wants are greater than our limited resources.
Since we are unable to have everything we desire, we must make choices on how we will use our resources.
In economics we will study the choices of individuals, firms, and governments.
Economics is the study of _________.
choices

3. (Study of how individuals and societies deal with ________)
Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on welfare.
Economics Defined
Economics-Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants.
(Study of how individuals and societies deal with ________)
scarcity

4. Keep in Mind…
“ In spite of the practical benefits, economics is mainly an academic, not a vocational, subject…economics is NOT primarily a how-to-make-money area of study.”

5. Micro vs. Macro MICROeconomics- MACROeconomics-
Study of small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc.)
MACROeconomics-
Study of the large economy as a whole or in its basic subdivisions (National Economic Growth, Government Spending, Inflation, Unemployment, etc.)

6. How is Economics used? Positive vs. Normative
Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics.
These theories are then applied to fix problems or meet economic goals. This is called policy economics.
Positive vs. Normative
Positive Statements- Based on facts. Avoids value judgements (what is).
Normative Statements- Includes value judgements (what ought to be).

7. Would you see the movie three times?
Thinking at the Margin
# Times Watching Movie
Benefit
Cost
1st
$30
$10
2nd
$15
3rd $5
Total
$50
Would you see the movie three times?
Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time.

8. Marginal Analysis In economics the term marginal = additional
“Thinking on the margin”, or MARGINAL ANALYSIS involves making decisions based on the additional benefit vs. the additional cost.
For Example:
You have been shopping at the mall for a half hour, the additional benefit of shopping for an additional half-hour might outweigh the additional cost (the opportunity cost).
After three hours, the additional benefit from staying an additional half-hour would likely be less than the additional cost.

9. Marginal Analysis
Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home”
In reality the decision making process started with “should I go to the mall at all.”
Once you are there you thought “should I stay for an additional half hour or should I go.”
The MARGINAL ANALYSIS approach to decision making is more comely used than the “all or nothing” approach.

10. Marginal Analysis
Notice that the decision making process wasn’t “should I go to the mall for 3 hours or should I stay home”
You will continue to do something until the marginal cost outweighs the marginal benefit.
In reality the decision making process was “should I go to the mall at all.”
Once you are there you thought “should I stay for an additional half hour or should I go.”
The MARGINAL ANALYSIS approach to decision making is more comely used than the “all or nothing” approach.

11. 5 Key Economic Assumptions
Society’s wants are unlimited, but ALL resources are limited (scarcity).
Due to scarcity, choices must be made. Every choice has a cost (a trade-off).
Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”
Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice
Real-life situations can be explained and analyzed through simplified models and graphs.

12. Which flight should you choose? Why?
Given the following assumptions, make a rational choice in your own self-interest (hold everything else constant)…
1. You want to visit your friend for a weekend
2. You work every weekday earning $100 per day
3. You have three flights to choose from:
Thursday Morning Flight= $200
Thursday Night Flight = $275
Friday Early Morning Flight = $300
Thursday Morning: Cost in work Price is Loss of 400
Thursday Night: Cost in work Price is 275. Loss of 375
Friday Morning: Cost in work 100. Price is Loss of 400
Which flight should you choose? Why?

13. Trade-offs and Opportunity Cost
ALL decisions involve trade-offs.
Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.
(Examples: going to the movies)
The most desirable alternative given up as a result of a decision is known as opportunity cost.
What are trade-offs of deciding to go to college?
What is the opportunity cost of going to college?
GEICO assumes you understand opportunity cost. Why?

14. Economic Terminology Utility = Satisfaction! Marginal = Additional!
Allocate =
Distribute!

15. What’s the price? vs. How much does that cost?
Scarcity vs. Shortages
Scarcity occurs at all times for all goods.
Shortages occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary.
Price vs. Cost
What’s the price? vs. How much does that cost?
Price= Amount buyer (or consumer) pays
Cost= Amount seller pays to produce a good
Investment
Investment= the money spent by BUSINESSES to improve their production
Ex: $1,000 new computer, $1 Million new factory

16. Goods vs. Services Give examples…
Goods= physical objects that satisfy needs and wants
Consumer Goods- created for direct consumption (example: pizza)
Capital Goods- created for indirect consumption (oven, blenders, knives, etc.)
Goods used to make consumer goods
Services= actions or activities that one person performs for another (teaching, cleaning, cooking)

17. The 4 Factors of Production

18. The Four Factors of Production
Producing goods and services requires the use of resources- DUH!.
ALL resources can be classified as one of the following four factors of production:
Land
Labor
Capital
Entrepreneurship

19. The Four Factors of Production
Land = All natural resources that are used to produce goods and services. Anything that comes from “mother nature.” (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.)
Labor = Any effort a person devotes to a task for which that person is paid. (manual laborers, lawyers, doctors, teachers, waiters, etc.)

20. The Four Factors of Production
Two Types of Capital:
1. Physical Capital- Any human-made resource that is used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.)
2. Human Capital- Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.)

21. The Four Factors of Production
Entrepreneurship= ambitious leaders that combine the other factors of production to create goods and services.
Examples-Henry Ford, Bill Gates, Inventors, Store Owners, etc.
Entrepreneurs:
Take The Initiative
Innovate
Act as the Risk Bearers
So they can obtain _________.
PROFIT
Profit= Revenue - Costs

22. The Four Factors of Production
Classify the Factors of Production in the following scenario:
You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.
The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

23. Accountants vs. Economists
Accountants look at only EXPLICIT COSTS.
Explicit costs are the traditional “out-of pocket costs” of decision making.
Ex: Going to Disneyland
Economists look at the EXPLICIT COSTS and the IMPLICIT COSTS.
Implicit costs are the opportunity costs such as forgone time and forgone income.
Ex: Payton Manning leaves the NFL to open a taco shop.

24. The Economizing Problem…
WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but unlimited resources