1. Econ 201 Lecture 1 What is Economics? Key Concepts and Terms

2. What is Economics It is the study of how people make choices in the marketplace –Consumers (you and me) How to allocate your time –Studying versus work versus socializing versus sleep How to allocate your income –Saving (future consumption) versus current consumption –Allocating income/budget among various goods »Food, housing, transportation, “fun”

3. What is Economics It is the study of how people make choices in the marketplace –Firms (and their managers) Which goods to produce –How to allocate your investment (capital) –How to allocate your labor among various products and/or lines-of-business (wireline vs wireless) Which technology to use –Emphasize capital or labor –Which inputs, quality of inputs »Coal vs natural gas – electricity production

4. Choices and Scarcity The reason people/firms need to make choices is because of scarcity –“ You can’t have it all” Limits on resources, time, money/income “dictate” that individuals have to choose how to allocate their “scarce” resources to their maximum value/use –“Opportunity costs ” : since resources are scarce and you will have to make choice Opportunity costs: what did you have to give up in order to use the resource for this particular use “opportunity costs” are the costs of the “highest valued” foregone alternative That is, there are tradeoffs between alternatives

5. Economics and Scarcity Lionel Robbins (1932):Lionel Robbins "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs.Scarcityresources Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.economic problem choices

6. Basic Economics Vocabulary Scarcity Opportunity Cost Tradeoffs Benefit/Cost Analysis

7. Scarcity There are not enough resources to produce and consume all of the goods and services we desire –Consumer: income, time are scarce resources Income – allocated between various goods, current vs future consumption –Firms Allocation of labor/materials between various products or lines-of-business (wireless vs landline) Decisions about technology to use (coal vs nat gas)

8. Scarcity Limits on resources implies that decisions must be made about: –What to produce (how to allocate scarce natural resources, labor) –How to produce it (which technologies, natural resources) –Whom to produce it for (allocation of the good) Could be done by: –Government direction (centrally planned economy) –Market forces (price signals)

9. Opportunity Costs Scarcity implies that choices must be made –Choice implies that there is a trade-off or “opportunity cost” (foregone alternative) Opportunity cost is defined as: –The value of a good, service or resource in its next highest valued use – consequence of scarcity Every decision has an opportunity cost –Alaska: potential value of gold mining could disrupt Copper River Salmon run –Choice of academic majors –How to spend time or money

10. Opportunity Costs Opportunity costs are not only “observable” economic costs, but also “unobservable” (or non-monetary) costs –Opportunity costs of time Commute example –Car –Bus –Bike

11. Commute Example Monetary costs associated with each alternative –Car Initial purchase expense (fixed), O&M (variable: fuel, maintenance, depreciation, licenses, insurance, parking), time of commute –Bus Time + fee –Bike Initial purchase (bike and lock), O&M (tires, tune-ups, clothing), time of commute

12. Monetary Costs Are Only Part of the Picture Non-pecuniary benefits/costs –Non-pecuniary: not directly measurable by $ Car –Benefit: flexibility to come/go –Costs: traffic jams, road rage, finding a parking space Bus –Benefits: reading time, “no hassle”

13. Monetary Costs Are Only Part of the Picture Bus –Costs: no flexibility on time Bike –Benefits: flexibility, improved health –Costs: bad weather, lighting  Choose the alternative that has the greatest net benefits

14. Basic principle of economic choice Individuals [or firms] choose their actions on the basis of expected additional [net] benefits and cost to themselves –In this case -> alternative chosen will be the one that yields the largest net benefits –Paul Heynes’ “economizing process” Modest changes in monetary costs and benefits can induce people to alter their behavior –Cold, wet weather increases the costs of bike commuting (or parking on the street)

15. Cost/Benefit Analysis Proper framework for analyzing economic decisions is to compare the costs and benefits of the alternatives –Cost and benefits include not only directly observable/measurable economic costs and benefits, but also –Opportunity costs (e.g., time), –Non-pecuniary benefits

16. Key Terms Common understanding of key terms –Use them as shorthand for the concept; but have a precise/exact meaning Scarcity – There are not enough resources to produce and consume all of the goods and services we desire Opportunity costs –What must be given up (next best alternative use) as a result of a decision or choice –“No such thing as a free lunch” (Milton Friedman) Cost-benefit analysis –Every decision/action has tradeoffs