1. Chapter 1 An Introduction to the Economic Way of Thinking
Introduction to Economics: Social Issues and Economic Thinking
Wendy A. Stock
PowerPoint Prepared by Z. Pan
Chapter 1 An Introduction to the Economic Way of Thinking
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2. After studying this chapter, you should be able to:
Define economics
Explain how scarce resources influence choices
Describe the influence of benefits and costs on deciding among alternatives
Identify the decision rules individuals and firms use to make choices
Explain why decisions are made “at the margin”
Assess the general conditions that generate maximum utility or profits
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3. Definition of economics
Economics is the study of choices.
Economics is a tool or way of looking at the world
Economics help us to understand all kinds of choices
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4. Microeconomics and Macroeconomics
Macroeconomics deals with choices that societies make.
Microeconomics deals with the choices individuals, households, and businesses make.
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5. Copyright © 2013 John Wiley & Sons, Inc.
Why Study Economics?
Improve decision-making skills
Improve critical thinking skills
Develop analytical and quantitative skills
Understand many current issues
Approach controversial issues with objectivity and clarity
Prepare for graduate school in many fields
Better job opportunities
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Scarcity
Scarcity occurs when we have fewer resources than we have uses for those resources.
Scarcity implies choices
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7. Three basic economic resources
Labor – laborers combine time and energy to produce goods or services
Land – including natural resources, water, and clean air
Capital - long-lasting tools or skills used in producing goods and services
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How choices are made?
Decision makers make choices by comparing benefits and costs.
Benefit of a choice is what you gain when you make the choice.
Cost of a choice is what you give up to make the choice.
Utility - the satisfaction or happiness individuals get from their choices.
Profit - the difference between the earnings and the costs of production.
Copyright © 2013 John Wiley & Sons, Inc.

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Opportunity cost
The opportunity cost of a choice is the value of the next-best alternative foregone.
Opportunity cost is a valuation of the next-best alternative opportunity not chosen.
What’s the opportunity cost of going to college?
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10. Opportunity cost of college
Private
Public
Tuition & fees
$27,000
$7,600
Books and Supplies
$1,000
Estimated wages with HS Diploma
$28,000
Annual Total
$56,000
$36,600
Four Years Total
$224,000
$146,400
Class days:
32 weeks x 5 = 160 days/yr. x 4 = 640 days
Cost of Missing One Day Class:
$350.00
$228.75
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11. economic way of thinking
“Incentives Matter”
When people respond to incentives and consider costs and benefits of their possible choices in order to maximize their utility or profit, they engage in the economic way of thinking.
As the benefits of making a particular choice increase, you are more likely to make the choice.
As the costs of making the choice increase, you are less likely to make the choice.
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12. Ceteris paribus assumption
Ceteris paribus means “all other things remaining constant or all else equal.” e.g. If the correct amount of fertilizer is added to a crop and at the same time there is a heat wave and drought, the crop yield may actually fall. Thinking the fertilizer is not effective is a violation of ceteris paribus assumption.
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13. Decisions Are Made “At the Margin”
The marginal cost of a choice is the additional or incremental cost associated with the choice.
The marginal benefit of a choice is the additional or incremental benefit associated with the choice. ?
Marginal Benefits ≷ Marginal Costs
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14. Law of Diminishing Marginal Benefits
The Law of Diminishing Marginal Benefits: Ceteris paribus, as more and more of an activity is done, the marginal benefits derived from the activity tend to diminish.
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15. Law of Diminishing Marginal Benefits
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16. Law of increasing Marginal costs
The Law of Increasing Marginal Costs: Ceteris paribus, as more and more of an activity is done, the marginal costs of the activity tend to increase.
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17. Law of increasing Marginal costs
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18. Marginal decision rule
The Marginal Decision Rule states that you can maximize the net benefit you receive from an activity when you engage in that activity until the marginal benefits are equal to the marginal costs.
MB = MC
The Net benefit of an activity is equal to its total benefit minus its total cost.
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19. Marginal decision rule
The Marginal Decision Rule: MB = MC
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Sunk cost
A Sunk Cost is a cost that, once incurred, cannot be recovered.
Sunk costs are irrelevant when making decisions at the margin.
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21. Questions/Discussions
Discuss the costs and benefits of each of the following activities; include at least one nonmonetary cost and benefit in your discussion of each: a. Studying for an exam b. Going skiing on a class day c. Taking a job d. Watching television
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22. Copyright © 2013 John Wiley & Sons, Inc.
Key Concepts
Economics
Opportunity cost
Macroeconomics
Ceteris paribus
Microeconomics
Marginal cost
Basic economic resources
Marginal benefit
Law of diminishing marginal benefits
Scarcity
Cost
Law of increasing marginal cost
Benefit
Net benefit
Utility
Marginal decision rule
Profit
Sunk cost
Copyright © 2013 John Wiley & Sons, Inc.