1. 0 The Basics of Economics (Chapter 1)

2. 1 “Billions of people could benefit from better economic policies. Millions are dying because of bad ones. Sometimes the logic of economics is so compelling that it’s impossible for economists not to take a stand.” Tim Hartford (author of The Undercover Economist)

3. 2 Economics  The study of how society manages its scarce resources by making decisions.

4. 3 Are these scarce? CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

5. 4 Yes! All goods and services are scarce!!! CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

6. 5 Good Service Something that you can use or consume Something that is done for you

7. 6 So back to what economics is… CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

8. 7 Lets pretend you have found a new tropical island that is inhabited by strange individuals...These people need so much help that they gave you the power to make all of their societal decisions. Currently, the society relies on themselves and their surroundings. Based on all of this info, what are your first areas of concern as the leader of this society?

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10. 9 MICROECONOMICS is based on the same concept but the decisions that are made are on a much smaller scale… CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

11. © 2007 Thomson South-Western 1. Key Economic Questions Society faces many decisions:  What goods and services will be produced?  Who will produce the goods and services?  Who will consume the goods and services?

12. © 2007 Thomson South-Western 2. The Factors of Production LAND LABOR CAPITAL The resources that are used to produce goods and services

13. © 2007 Thomson South-Western 3. Physical vs. Human Capital Physical Capital are the man made assets that are used in production. Ex. shovel, nail, plastic, etc. Human Capital is the knowledge that is needed in production. Ex. a doctor administering an X-Ray, Mr. Vesper teaching the most awe-inspiring lessons in the history of education.

14. © 2007 Thomson South-Western 4. Market A group of buyers (consumers) and sellers (producers) of a particular good or service

15. © 2007 Thomson South-Western 5. The People Who Make Up A Market Households Consumer of goods and services. They ARE the factors of production. Firms Producers of goods and services. They USE the factors of production.

16. © 2007 Thomson South-Western Household or Firm?

17. © 2007 Thomson South-Western Household or Firm?

18. © 2007 Thomson South-Western 6. Society and Scarce Resources The management of society’s resources is important because resources are scarce. Scarcity... means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

19. © 2007 Thomson South-Western Basic Principles of Economics

20. © 2007 Thomson South-Western Principle #1: People Face Trade-offs What you give up because of a decision Efficiency v. Equity Efficiency means society gets the most that it can from its scarce resources. Equity means the benefits of those resources are distributed fairly among the members of society. Basket of Knowedge! If society decides to be more equitable, what will happen to efficiency?

21. © 2007 Thomson South-Western Result… Equity Efficiency

22. © 2007 Thomson South-Western Principle #2: The Cost of Something Is What You Give Up to Get It. Basketball star LeBron James decided to give up college and play pro basketball. So, what was his cost? Do you think that was the correct decision?

23. © 2007 Thomson South-Western Opportunity Cost The MOST desirable alternative that is given up because of a decision

24. © 2007 Thomson South-Western Which is the opportunity cost of this decision? You decide to buy a $50,000 car.

25. © 2007 Thomson South-Western High Opportunity Cost Low Opportunity Cost Should I rob a bank? Should I steal one strawberry from the produce section at Jewel?

26. © 2007 Thomson South-Western Marginal changes are small, incremental adjustments to a decision. People make decisions by comparing costs and benefits at the margin. Principle #3: Rational People Think at the Margin. Example: Should I hire one more additional worker?

27. © 2007 Thomson South-Western Principle #4: When making decisions, people use the Cost Benefit Analysis When thinking at the margin, you only add one more unit if the benefit is still larger than the cost. Benefits can also be called incentives.

28. © 2007 Thomson South-Western What if…. Marginal Cost = $2,000 Marginal Benefit = You play the game for a month and quickly lose interest

29. © 2007 Thomson South-Western Principle #5: Trade Can Make Everyone Better Off. Trade allows people to specialize in what they do best.

30. © 2007 Thomson South-Western Principle #6: Markets Are Usually a Good Way to Organize Economic Activity. A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. I will let the citizens decide how to answer the key economic questions Hey Congress, that’s smart because I am only going to produce what keeps my business running. So, most of society will get what they want.

31. © 2007 Thomson South-Western Principle #6: Markets Are Usually a Good Way to Organize Economic Activity. Adam Smith made the “invisible hand” theory. Because households and firms look at prices when deciding what to buy and sell, they unknowingly regulate the market.

32. © 2007 Thomson South-Western Principle #7: Governments Can Sometimes Improve Market Outcomes. Markets work only if property rights are enforced. Property rights are the ability of an individual to own and exercise control over a scarce resource Market failure occurs when the market fails to allocate resources efficiently. When the market fails (breaks down) government can intervene to promote efficiency and equity.

33. © 2007 Thomson South-Western Principle #7: Governments Can Sometimes Improve Market Outcomes. Market failure may be caused by: an externality, which is the impact of one person or firm’s actions on the well-being others. market power, which is the ability of a single person or firm to unduly influence market prices.

34. © 2007 Thomson South-Western Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services. Almost all living standards are linked to the countries’ productivity. Productivity is the amount of goods and services produced from each hour of a worker’s time.