1. Basic Economic Concepts1
Basic Economic Concepts
Scarcity, Opportunity Cost & PPC

2. Key Assumptions in Economics
People are rationally self-interested
They seek to maximize their utility (happy points)
People generally make decisions at the margin
They weigh the marginal benefit against the marginal cost of a decision
Ceteris Paribus assumption
Economists hold all other factors constant, except for what’s being considered

3. Basic Economic Vocabulary
Economics
The study of choices people make to satisfy their needs and wants
Microeconomics
The study of how individuals and firms deal with scarcity
Macroeconomics
The study of how society as a whole deals with scarcity

4. Basic Economic Vocabulary
Goods
Physical objects that can be purchased
Services
Actions or activities performed for a fee
Consumers
People who purchase goods and services
Producers
People who produce g/s
People who supply goods and services

5. Needs Wants Necessities for survival
Goods and services consumed beyond what is necessary for survival
9/2/13

6. Resources / The Factors of Production
Economists classify resources into 4 categories
Land
Natural resources
The payment for Land is RENT
Labor
Human resources
The payment for Labor is WAGES

7. 3. Capital (a product of Investment)
Tools, machines, factories
The payment for Capital is INTEREST
4. Entrepreneurship
Risk-taker producing a profitable combination of land, labor and capital in new ways in order to make profit.
The payment for Entrepreneurship is PROFIT
9/2/13

8. SCARCITY
Economics is the study of limited resources and unlimited needs and wants
Scarcity leads to making choices
Trade-offs are faced when it comes to using available resources.
Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”
Every decision has an opportunity cost

9. SCARCITY Marginal decision making = the result of an additional change
Marginal benefits vs. marginal costs is the basis for making the decision
Examples:
1 more hour of sleep vs. eating breakfast
Part time job vs. goofing off
College vs. full time job

10. Opportunity Cost
Once a resource or factor of production has been put to productive use an opportunity cost is incurred.
Opportunity cost is the next best alternative use for a resource.
Ex. If the 3 cups of flour are used to bake bread, then the opportunity cost is the cake that could also have been baked with the 3 cups of flour.
No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.

11. There is no such thing as a free lunch.
TINSTAAFL
There is no such
thing as a free
lunch.
Everything has a cost.

12. Agenda 9/4 PPC notes/ practice Circular Flow quiz? HW instructions
9/2/13

13. PPC The PPC = The Production Possibilities Curve
The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.
Illustrates scarcity, choices & opportunities costs
Points on the curve show production amounts possible for 2 goods
Capital goods
Point A
Consumer Goods

14. Production Possibilities Schedule
Good A B C D
Coconuts 9 15 30
Fish 40 28 20
(draw on board)
9/2/13

15. Point A Y = Point Not Possible X = Point possible, but inefficient
Capital Goods
Point A
Y = Point Not Possible
Consumer Goods
X = Point possible,
but inefficient

16. Review: SCARCITY
Economics is the study of limited resources and unlimited needs and wants
Scarcity leads to making choices
Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”
Every decision has an opportunity cost

17. Review: SCARCITY
Marginal decision making = the result of an additional change
Marginal benefits vs. marginal costs is the basis for making the decision
Examples:
1 more hour of sleep vs. eating breakfast
Part time job vs. goofing off
College vs. full time job

18. CAPITALISM – MARKET ECONOMY
Ownership of all resources is in the hands of individuals
Decision making is by individuals in the market
Voluntary exchange of goods and services
Self interest influences all decisions – to the benefit of society
Competition is the regulating mechanism

19. CAPITALISM – MARKET ECONOMY
Markets and Prices coordinate the millions of decisions
System is facilitated by:
Specialization
Use of money
Technology
Active, but limited government involvement

20. CAPITALISM – MARKET ECONOMY
Basic Questions every society must ask:
What goods & services to produce?
How to produce?
How much to produce?
For whom to produce?
How will changes be implemented?

21. Agenda 9/5 Turn in HW Circular Flow Quiz  Fast Food reading
Test review/practice
9/2/13