1. Fundamental Economic Concepts

2. } Stay Tuned! Book Auction
What economic concepts were demonstrated by the book auction?
Scarcity
Value
Choices
Rationing
Equity vs. Efficiency
Which was the sealed auction? }
Stay Tuned!

3. If you won a $500 billion lottery, what would you buy with the money?
Name some things you’d want to buy.
Would your list ever end?
Why not?

4. What is Economics? -Economics is the science of scarcity
- The study of mankind’s unlimited desires in a world of limited resources.
-Economics is the science of scarcity
-Since we are unable to have everything we desire, we must make CHOICES on how we will use our resources.
In economics we study the choices of individuals, firms, and governments
Microeconomics deals with individual decisions, Macroeconomics looks at the economy as a whole

5. 5 Key Economic Assumptions
Society has unlimited wants and limited resources (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 makes decisions by comparing the marginal costs and marginal benefits of every choice.
Real-life situations can be explained and analyzed through simplified models and graphs.
Copyright
ACDC Leadership 2015

8. Copyright
ACDC Leadership 2015

9. Copyright
ACDC Leadership 2015

10. What is the Economy?
You are…. We all are.

11. OR… Why Do We Study It? 1. To describe 2. To analyze 3. To explain
4. To predict
OR…

12. Why do we study Economics?
So we don’t get screwed.

13. Scarcity
Situation that occurs when wants are greater than available resources.
Scarcity is the fundamental problem in economics.

16. In this classroom, is/are _________ scarce?
Desks?
Water?
Books?
Gasoline?
Jolly Ranchers? …
Good looking economics instructors?
Wants are satisfied by available resources
But not in the hallway…
No want for it in classroom, but outside… yes
Wants exceed available resources

17. Good looking economics instructors?

18. How does scarcity impact you on a daily basis
How does scarcity impact you on a daily basis? List at least 3 ways, then share with a partner.

19. Utility
The satisfaction that consumption of a good or service provides

20. Paradox of Value Water vs. Diamonds Monetary Value
Must be scarce
Must give utility
Are diamonds scarce?
Do they give utility?
Conspicuous consumption
Examples?

21. DIMINISHING MARGINAL UTILITY
JBC
Utils Each
As you consume additional units of a good, at some point each additional unit will begin providing less utility than the one before it.

22. Cost – Benefit Analysis
Question? :
What do you want RIGHT NOW?

23. Cost – Benefit Analysis
Follow up question? :
Why don’t you go get it?

24. Cost – Benefit Analysis
• We all make decisions in our own self-interest
• All decisions come with certain trade-offs and alternatives
• THERE IS NO SUCH THING AS A FREE LUNCH!!!
• Opportunity Cost: the next-best alternative given up when making a choice
What is the opportunity cost of going to college?

25. Opportunity Cost
VS.
VS.
VS.

26. 46. D

27. Marginal Cost Marginal = Additional, next
Additional cost vs. additional benefit
We constantly engage in
marginal analysis

28. 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.
Copyright
ACDC Leadership 2015

29. Marginal Analysis
Marginal analysis (aka: thinking on the margin) making decisions based on increments
Example:
When you decide to go to the mall you consider the additional benefit and the additional cost (your opportunity cost).
Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends.
Since your marginal benefits and costs can quickly change your analyzing them every second.
What if your ex-girlfriend shows up?
The Point: You will continue to do something as long as the marginal benefit is greater than the marginal cost
Copyright
ACDC Leadership 2015

31. Turn to a partner and share a recent example of marginal thinking in your life.

32. Economic Terminology Utility = Satisfaction! Marginal = Additional!
Allocate =
Distribute!
Copyright
ACDC Leadership 2015

33. Scarcity forces us to ask the following questions…
WHAT to produce?
HOW to produce?
FOR WHOM to produce?

34. Imagine a scenario where…
…we take an all-expenses-paid class trip to…

35. Australia!

36. Our plane is forced to make a “water landing,” and we are able to swim to an uncharted island.
You are in charge. Prioritize 3-5 things we’ll have to do to survive and how (and with who) we should accomplish these tasks.

37. Specialization
Allocating resources toward production for which they are best suited.

38. FACTORS OF PRODUCTION Land – all gifts of nature
Labor – human efforts and abilities
Capital – tools, equipment, space
Entrepreneurship – risk taking, ideas
**The “spark” or driving force of the economy**

39. I have an idea….
Am I an entrepreneur?

40. EXAMPLES: Durable vs. Nondurable goods
Durable – lasts more than 3 years
Nondurable – lasts less than 3 years

41. Adam Smith “Wealth of Nations” Invisible hand 1776 Meat Bread Candles
How do we decide to provide these?

42. Where does govt. fit in?
CIRCULAR FLOW
GOVERNMENT

43. The Business Cycle Trend Growth Peak Peak Peak Expansion Recession
Level of Real Output
Recession
Expansion
Trough
Recession
Trough
Time

44. But Remember...

45. 5 Key Economic Assumptions
Society has unlimited wants and limited resources (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 makes decisions by comparing the marginal costs and marginal benefits of every choice.
Real-life situations can be explained and analyzed through simplified models and graphs.
Copyright
ACDC Leadership 2015

46. 46
Copyright
ACDC Leadership 2015

47. Production Possibilities Model
Illustrate production choices
Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
1-47

48. Production Possibilities Frontier
All possible combinations of two products that can be produced when employing 100% of available resources.
Guns (thousands)
A 80
B 75
C 60
D 30
E 0
Butter (tons)
150
300
400
450
Let’s Graph it!

50. Production Possibilities Frontier
How could we get to point H in the future?
What does point H represent?
Why is the curve bowed out from the origin?
What do points F and G represent?
Law of Increasing
Opportunity Cost…
…due to the specialization of resources
Unattainable Production
Unemployed Resources
Economic Growth

51. The Law of Increasing Opportunity Cost
As you increase production of one good, the opportunity cost to produce an additional unit of that good will increase.
This opportunity cost is represented by an increasing number of an alternative good given up.
This occurs because all resources are specialized and as you pull resources from Good A to produce more of Good B, you begin to take resources that are progressively less useful for Good B and more useful for Good A.

52. Production Possibilities Table
Production Alternatives
Type of Product A B C D E
Pizzas
(in hundred thousands) 1 2 3 4
Industrial Robots
(in thousands) 10 9 7 4
Plot Points to Create Graph…
1-52

53. Production Possibilities CurveA’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable A
Economic
Growth B C’ C
Industrial Robots D’ D
Now Attainable
Attainable E E’
Pizzas
1-53

54. Production Possibilities CurveA’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 B’
Unattainable A B C’ C
Industrial Robots D’ D
Attainable E E’
Pizzas
1-54

55. Quick Quiz Why is the PPF bowed out from the origin?
Law of increasing opportunity costs…
…due to specialization of resources
What is the marginal opportunity cost of the 2nd unit of pizza?
2 thousand robots
Which point(s) on the curve represent full employment of resources?
All points ON the curve

56. The Future Economy Consequences of unemployment Economic growth
More resources
Better quality resources
Technological advances
1-56

57. Future Possibilities Compare Two Hypothetical Economies Presentville
Curve
Future
Curve F
Goods for the Future
Goods for the Future P
Current
Curve
Current
Curve
Goods for the Present
Goods for the Present
Presentville
Futureville
1-57

58. How do people manage these limitations?
TRADE!!

59. Unit 1 Review Guide – Topic List
Scarcity
Utility
Diminishing Marginal Utility
Opportunity Cost
Cost/Benefit analysis
Marginal Cost
Marginal analysis
3 Production Questions
Factors of production and trade
Specialization
Production Possibilities Frontier
Circular Flow Model
Invisible Hand
Relevant Textbook Sections:
Ch. 1, lessons 1-3