1. Common Economic Concepts and Reasoning
MT 1

2. Intro What is economics? Why study it?
Do you get everything you ever want?
Why not?
Describe your perfect mate. From how they look to how they act, etc…
How many people fit this description?

3. What the heck is economics?
The study of the way people make decisions to satisfy what they want or need using their limited resources.
Why is this important????????

4. Why do we have to make choices?
2 factors cause us to make choices
Factor #1: SCARCITY BABY!!!!!!!!!!!
Always Present
There is a limited supply of natural resources and we have unlimited wants
Which means no one can get everything they have ever wanted
Factor #2:Shortages
Only from time to time
When producers will not or cannot produce the goods people want at current prices

6. Scarcity and Choice
Human wants are unlimited, but resources are limited
Therefore three basic questions must be answered in order to decide what to do with limited resources;
What gets produced?
How is it produced?
Who gets what is produced?

7. Four Economic Resources (Factors of Production)
Land
Labor
Capital
Entrepreneurial ability

8. Land
Includes natural resources such as timber, oil, coal, iron ore, soil, water, as well as the ground in which these resources are found
Provides the site for factories, office buildings, shopping centers, homes, etc.
Produces “rent”
2-6
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

10. Labor
The work and time for which one is paid is what economists call “labor”
Money received for one’s labor is called wages and/or salaries
About two-thirds of the total resource cost is the cost of labor

12. Capital
Man-made goods used to produce other goods or services is what economists call “capital”
Examples are office buildings, stores, and factories
The money owners of “capital” receive is called “interest”
Capital is the MOST important of the four economic resources

14. Entrepreneurial Ability
The entrepreneur
Sets up a business
Assembles the needed resources
Risks his/her own (or borrowed) money
Makes a “profit” or incurs a “loss”
Is central to the American economy
23 million businesses are virtually all entrepreneurs
The vast majority work for themselves or have one or two employees

15. Why we have to make choices.
Scarcity: There are limited natural resources to satisfy people’s unlimited wants.
Every decision has a cost, not only to consumers, but to producers as well…

16. No such thing as a free lunch
Due to scarcity, everything has a cost.
Anything advertised for free, Is still not free!!!!!!

17. Scarcity and Choices (1.2)
Think about the last purchase you made.
What was the decision making process?
Why did you not just buy what you wanted without even thinking about it?
Was there something you lost out on because you decided to buy that good or service?

18. Decision Costs Consumer costs:
Opportunity Costs: The cost of the next best alternative given up in a decision

19. Highest Valued Alternative
Options
Watch TV
Talk on the telephone
Go on a date
Study economics
The opportunity cost here is the highest valued alternative that could have been chosen (i.e., study economics)
Choice made
Highest valued alternative
2-12
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

20. Inherit $40,000 Can’t go to college Bought the car
Two choices – buy a car or go to college
Bought the car
(Paid $40,000)
Can’t go to college
College graduate (lifetime earnings) $1,300,000
High School graduate (lifetime earnings) $800,000
$ 500,000
Opportunity Cost
2-13
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

21. California 1967-1997 Prisons Colleges
Added 21 additional prisons
Colleges
Added 1 additional college
The Opportunity Cost of building more prisons is building fewer colleges
2-14
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

22. California 1990 - 1997 Prison guards College employees
+ 10,000
College employees
- 10,000
Obviously, the opportunity cost of one additional prison is guard is one college employee
2-15
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

23. Thinking at the Margin
What type of benefit does one get for the opportunity cost? (Marginal Benefit)
What is the opportunity cost for one additional unit of something? (Marginal Cost)
Example: Work vs. Studying
What is the benefit of working an extra hour?
What is the benefit of studying an extra hour?

24. How do people choose? Take into consideration several factors:
Is the item a want or a need?
What trade-off is involved?
What is the opportunity cost involved?
What utility do I get from it?

25. Explanation How is a want different from a need? What is a trade-off?
Have to have it to survive. (only 3)
What is a trade-off?
What you gave up to do what you did
What is an opportunity cost?
The cost of the most desirable alternative given up.

26. Need or want?

27. Need or Want?

29. 3 Basic Economic Questions
What to produce?
Who to produce it for?
How to produce it?

30. How to best use resources (MT 1.6)
The frontier/economic growth
Underutilized resources

33. Review Curve
Anything inside of the graph represents resources not being used efficiently
Cannot reach frontier without acquiring new resources.
Can only be used to compare two goods (Opportunity costs)
Used to see how to best utilize their resources in making the goods

34. Goods? What are those????
Any physical object that people have or want.
Something tangible that can be held
What is the difference between a good and a service?
A service is an action or activity done by one person for another.
Waitress, hairdresser, mechanic, etc…

35. Forms of goods Consumer Good Durable Good Capital Good
Produced specifically for the consumer
Durable Good
Any good that lasts 3 or more years with regular use
Capital Good
Used to produce another good.

36. 1.3
When you go to a store, what catches your attention that makes you want to purchase a good or service?
If you are an employee, why makes you work hard for your boss, or job?

37. How do you entice someone to buy? (MT 1.3)
Incentives:
Monetary (extrinsic): Some kind of incentive money wise to get your attention
Sales, Buy this get this free, save $50 if you buy so many…
Non-Monetary (Intrinsic): You will be in style, you’ll be envied, you get the prettiest girl, et…
Utility:
The item must be useful to satisfy a want or a need.
Ask yourself: “Is this something I will use?”