1. Fundamentals of Economics

2. Outline of Unit Basic Economic Concepts
Scarcity, choice and opportunity cost
Production possibilities curve
Comparative advantage, absolute advantage, specialization, trade
Economic systems
Property rights and the role of incentives
Marginal analysis

3. What is Economics?
Social science deals with choice and how to allocate scarce resources
Also examines decision making when dealing with scarcity
Microeconomics: study of individual decision making such as a household or a firm
Ex: How much should businesses charge for products
Ex: How many hours should a person work

4. Scarcity, choice and opportunity cost
Section 1

5. Scarce Resources (fundamental problem in Economics)
Unlimited wants and needs for goods and services
Limited availability of resources to make goods/services
Permanent condition
Once used up can not be replaced
Exclusive use
Desirable

7. Resources (Factors of Production)
Land: anything that comes from earth
Ex: Trees
Labor: human beings and their physical and mental skills
Ex: Teachers
Capital: man made items that are used to produce goods and services
Ex: Factories
Entrepreneurship: the ability to create ideas to produce goods and services
Ex: Business owners

8. Choice vs Trade-Off: choice between options of what to produce
Example: choosing between housing arrangements
Rent an apartment or buy a house?
Example: work or go to college after high school
Example: which good to produce, how much of each good to produce? vs

9. Cost Choices lead to costs – something must be sacrificed
Opportunity cost: second best alternative that is given up when making a choice
Example: go to college instead of work
Opportunity cost: lost wages and goods/services that could be purchased

10. Examples of Opportunity Cost
Study for one hour or work in a coffee shop for $8 per hour.
What is the opportunity cost of choosing to study?
Study for one hour, work at a coffee shop for $8 per hour or mow your neighbor’s lawn for $10 per hour.
What is your next best alternative?

11. Production Possibilities Curve
Section 2

12. Production Possibilities Curve
Graph showing options for allocating resources between production of two different goods or services
Assumes all resources are fully employed and used efficiently
Shows the opportunity cost of producing
Curve shows efficient production (all resources being used efficiently)
Example:
Bakery owner has what resources?
Labor:
Capital:
Natural:

13. Options
Can make:
Cranberry Orange muffins Or
Almond Croissants

14. Production Possibilities Table
Cranberry Orange Muffins
Almond Croissant 10 1 8 2 6 3 4 5
What happens as more croissants are produced?
What happens as more muffins are produced?
What is the opportunity cost of producing 1 muffin?
What is the opportunity cost of producing 1 croissant?

15. Graphing Go to smartboard!! 5 Cranberry Orange Muffin 4 3 2 1 84 8
Almond Croissant 6 10 2

16. Law of increasing costs
Increasing PPC shows that as more of one good is produced, the more must be given up of the other good
Meaning the opportunity cost is increasing
Resources are not perfectly substitutable
Curve is bowed outward (concave)

17. Other types of PPC Constant PPC Decreasing PPC
Curve is a straight line
Resources are equally substitutable between goods/services
Decreasing PPC
Curve is bowed inward (convex)
Opportunity cost of producing is falling as produce more

18. Shifting PPC
PPC can move outward (economic growth) or inward (economic decline)
Technology moves the curve outward
War, natural disasters move curve inward
Inefficiency: producing less than capable of (below the curve)

19. Comparative Advantage
Absolute Advantage, Specialization, Trade
Section 3

20. Comparative Advantage: idea that one person/firm/country can produce at a lower opportunity cost than another, given the same resources
Absolute Advantage: idea that given the same resources, one person/firm/country can produce more of a good than another

21. Countries/firms/people will specialize in the production of what they have the comparative advantage in
Then they trade and get more goods/services overall
Allows them to be better off

22. Example Lochwald and Greymoor both grow apples and oranges
They use the same resources
Using all resources:
Lochwald
Greymoor
Apples
300
250
Oranges
200
175

23. Who has comparative advantage?
Lowest opportunity cost when growing apples
Lochwald: 300 apples: 200 oranges
Each apple produced has an opportunity cost of .67 oranges
300/300 = 200/300
1 apple = .67 orange
Greymoor: 250 apples: 175 oranges
Each apple produced has an opportunity cost of .7 oranges
250/250 = 175/250
1 apple = .7 orange

24. Who has comparative advantage?
Lowest opportunity cost when growing oranges
Lochwald: 300 apples: 200 oranges
Each orange produced has an opportunity cost of 1.5 apples
300/200 = 200/200
1.5 apple = 1 orange
Greymoor: 250 apples: 175 oranges
Each orange produced has an opportunity cost of .67 apples
250/175 = 175/175
1.42 apple = 1 orange

25. Lochwald has the lower opportunity cost in producing apples
Greymoor has the lower opportunity cost in producing oranges
Each should specialize and then trade

26. Practice
Ray and Dorothy can both cook and can both pull weeds in the garden on a Saturday afternoon. For every hour of cooking, Ray can pull 50 weeds and Dorothy can pull 100 weeds. Based on this information:
Ray pulls weeds since he has the absolute advantage in cooking
Dorothy pulls weeds since she has the absolute advantage in cooking
Dorothy cooks since she has comparative advantage in cooking
Ray cooks since he has comparative advantage in cooking
Dorothy pulls weeds since she has comparative advantage in cooking

27. Economic Systems
Section 4

28. Types of Systems
Market System: system where consumers and producers make the decisions about what is produced
Capitalism
Command System: system where the central planners/government owns key resources and decides what is produced
Socialism
Communism

31. Characteristics of a Market Economy
Private Property
Individuals own most resources
Freedom
Free to make own choices (what to buy, make, sell)
Self-Interest
Personal self interest drives decisions (businesses: profit, consumers: satisfaction)
Competition
Buyers and sellers free to enter and exit markets
Prices
Signals to buyers and sellers of what to produce and how to allocate resources; consumers must be able to pay price to acquire goods

32. 3 Questions of allocation
What to produce?
Who to produce it for?
How to produce?
Private (individual firms) or public (government)

33. Property rights and the role of incentives
Section 5

34. Property Rights Examples of property rights:
Private property rights: guarantees individuals the right to use resources as they choose or charge others for the use
Creates strong incentive to earn highest value possible from resources
Allows resources to be used for most productive use
Examples of property rights:
Intellectual Property Rights
Movies
Music
Novels, inventions, etc.
Physical Property Rights
Home
Cars, etc.

35. Protections of property rights by the government encourage people to be more productive

36. Marginal Analysis
Section 6

37. Marginal Analysis Marginal: additional, next one Consumers:
Marginal benefit (MB)– additional benefit earned
Marginal cost (MC)– additional cost faced
Consumers:
Marginal benefit and cost faced from consuming
Ex. An additional Latte is $4.75
Do I consume? If MB is more than $4.75 then yes

38. consumption increases?
How many Mocha Lattes?
Marginal Cost
Quantity Consumed
Marginal Benefit
$4.75 1 20 2 15 3 10 4 5
What happens to MB as
consumption increases?
Why?

39. Marginal benefit declines as consumption increases
Rules of marginal analysis:
If MB>MC do it
Stop when MB = MC
If MB < MC never do it

40. Graphing MB & MC $
$4.75 MC MB Q 5