2. Economics The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

5. Unlimited wants Limited resources to satisfy wants Choose between alternatives

6. Scarce Goods Food (bread, milk, meat, eggs, vegetables, coffee, etc.) Clothing (shirts, pants, blouses, shoes, socks, coats, sweaters, etc.) Household (tables, chairs, rugs, beds, goods dressers, television sets, etc.) Space exploration Education National defense Recreation Leisure time Entertainment Clean air Pleasant (trees, lakes, rivers, environment open spaces, etc.) Pleasant working conditions Limited Resources Land (various degrees of fertility) Natural (rivers, trees, minerals, Resources oceans, etc.) Machines and other human-made physical resources Non-human animal resources Technology (physical and scientific “recipes” of history) Human (the knowledge, skill, resources and talent of individuals) Scarcity and Choice

7. Economic reasoning focuses on the impact of marginal changes. Decisions will be based on marginal costs -the cost of buying or making one more unit and marginal benefits (utility). - The increase in satisfaction from buying or making one more unit don’t necessarily consider sunk costs. MB > MC  Do it! MC > MB  Don’t do it!

8. a.Someone must give up something if we are to have more scarce goods. b. The highest valued alternative that must be sacrificed is the opportunity cost of the choice. The use of scarce resources to produce a good is always costly. What must be given up to get one more unit of another good or service This class?

9. Market prices direct individuals pursuing their own interests to produce good that will benefit society

10. the price mechanism that guides our actions in a market. The invisible hand is an example of a market force. If there is a shortage, prices rise If there is a surplus, prices fall

11. The test of an economic theory is its ability to predict and explain events in the real world. It is very difficult to predict human behavior

12. Thinking Like an Economist!!! 1. Gather data 2. Study the data “Need facts to support theories and theories to make sense of facts.”

13. a. Inductive Methods Use facts to develop a model Take a survey and study the results b. Deductive See if the facts support a hypothesis Start with a theory and see if facts support it c. Abduction the combination of deduction and induction

14. Economic Insights Theories tie together economists’ terminology and knowledge about economic institutions An economic principle a commonly held insight stated as a law or general assumption An economic model places the generalized insights of the theory in a more specific contextual setting Theories are too abstract to apply in specific cases and are often embodied in economic models and principles

15. Models lead to… theorems (propositions that are logically true based on the assumptions of the model)… to arrive at policy precepts (policy rules that conclude that a particular course of action is preferable) Theories, models, and principles are continually tested to see of the predictions of the model match the data Then they are combined with knowledge of real-world economic institutions and value judgments to determine economic goals for society

16. Predicting Behavior Positive Economic Statements - relationships that can be tested - The class is half full - Unemployment is 6% - if incomes rise people spend money

17. Normative Economic Statements - statements about “what should be” or make a value judgment - It is too hot - Unemployment should be around 4% - we should raise the minimum wage.

18. Pitfalls 1.Ceteris Paribus – other things being equal - only consider price changes

19. 2. Cause and Effect – one event may not be the cause of another - sunrise and the rooster Pitfalls

20. 3. Fallacy of Composition – what is good for some may not be good for others - increased wages -time of this class Pitfalls

21. 2.Dependent Variable - Quantity, workers, - X axis 1.Independent Variable - Price, wages, $$$$$ - Y axis Economic graphs

22. 2.Inverse Relationship - Graph slopes down from left to right 1.Direct Relationship - Graph slopes up from left to right Economic graphs 3. Slope Rise Run

23. 1. When an economist states that a good is scarce, he means that: a. Production cannot expand the availability of the good. b. It is rare. c. Desire for the good exceeds the amount that is freely available from nature. d. People would want to purchase more of the good at any price. 2. The highest valued alternative that must be given up in order to choose an action is called its a. opportunity cost. b. utility c. scarcity d. ceteris paribus