1. An Introduction to the “Dismal Science” Choices, Scarcity, and Opportunity Costs Examined

2. The Rationale of Choice People choose… Choices impose costs…costs are incurred when making decisions Choices involve trade-offs among alternatives

3. The Reason for Choice… Lies in “ scarcity.” All wants and needs are unlimited, and the resources to satisfy those wants/needs are limited Ex.: Gas shortages in the 1970s All nations face the problem of allocating limited resources…

4. Economics Is the social science that deals with this problem … it analyzes how society allocates its scarce resources among its unlimited wants/needs

5. Opportunity Costs & Benefits For every choice you make, there is an opportunity cost and opportunity benefit Opportunity cost : value of the opportunity lost Opportunity benefit : what you have gained

6. If I go to the mall instead of doing my econ HW … What will I lose??? A good grade for doing my HW. This is the opportunity cost. What will I gain??? The fun of going to the mall. This is the opportunity benefit.

7. If I do my econ HW instead of going to the mall… What will I lose??? The fun of going to the mall. This is the opportunity cost. What will I gain??? A good grade for doing my HW. This is the opportunity benefit.

8. Another Opportunity Cost/Benefit Example You have an allowance of $20/week for lunch Pizza slice costs $2 and salad costs $4 What can you buy? A: 10 pizza slices, no salads (10 x $2 + 0 x $4) B: 8 pizza slices, 1 salad (8 x $2 + 1 x $4) C: 6 pizza slices, 2 salads (6 x $2 + 2 x $4) D: 4 pizza slices, 3 salads (4 x $2 + 3 x $4) E: 2 pizza slices, 4 salads (2 x $2 + 4 x $4) F: no pizza, 5 salads (0 x $2 + 5 x $4)

9. If you choose combination E instead of combination B … B: 8 pizza slices, 1 salad (8 x $2 + 1 x $4) E: 2 pizza slices, 4 salads (2 x $2 + 4 x $4) What is the opportunity cost? 6 pizza slices (8 minus 2) What is the opportunity benefit? 3 salads (4 minus 1)

10. Micro vs. Macro Microeconomics : examines individual choices concerning 1 product, firm, or industry (individual choice) Macroeconomics : examines the behavior of the whole economy at once (social choice)

11. 3 Basic Economic Questions 1. What to produce? 2. How to produce? 3. For whom to produce?

12. There are basically 2 different ways to answer these questions… 1. Centralized economic systems (command economies): with common property ownership and centralized direction (Marx) 2. Decentralized economic systems (market economies) : emphasizing private property and freedom of exchange (Smith)