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Fundamental Economic Concepts
-Scarcity, Choice, Opportunity Cost, Marginal Analysis(1-A,F)
I WON THE LOTTERY!
I’ll give you anything you want other than
money. What do you want? Would your list ever
end? Why not?
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What is Economics?- The study of mankind’s
unlimited desires in a world of limited resources.
-Economics is the science of scarcity
-Since we are unable to have everything we desire, we must make CHOICES on how we will use our resources.
In economics we study the choices of individuals, firms, and governments
Microeconomics deals with individual decisions, Macroeconomics looks at the economy as a whole
Positive vs. Normative Positive Statements- Based on facts. Avoids value judgements (what is).Normative Statements- Includes value judgements (what ought to be).
How is Economics used? • Economists use the scientific method
to make generalizations and abstractions to develop theories. This is called theoretical economics. • These theories are then applied to fix problems or meet economic goals. This is called policy economics.
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5 Key Economic Assumptions1. Society has unlimited wants and limited resources (scarcity). 2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off).3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”4. Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.5. Real-life situations can be explained and analyzed through simplified models and graphs.
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What is the Economy?
Why Do We Study It?
1. Description
2. Analysis
3. Explanation
4. Prediction
What? or How Much?
How? or Why?
When?
OR…
Why do we study Economics?
Sowe
don’t get
screwed.
Book AuctionWhat economic concepts were
demonstrated by the book auction?◦Scarcity◦Value◦Choices◦Rationing◦Equity vs. Efficiency
Which was the sealed auction?
◦Consumer surplus
}Stay Tuned
!
ScarcitySituation that occurs when wants are greater than available resources.Scarcity is the fundamental problem in economics.
In this classroom, is/are _________ scarce?Desks?Water?Books?Gasoline?Jolly Ranchers?…
Good looking economics instructors?
But not in the hallway…
Wants are satisfied by available resources
No want for it in classroom, but outside… yes
Wants exceed available resources
Good looking economics instructors?
We always assume….People make decisions based
upon RATIONAL SELF-INTEREST
We must consider…
Examples: Shelter is a need, a mansion is a want.
Food is a need, a large pizza is a want.
UtilityThe satisfaction that
consumption of a good or service provides
DIMINISHING MARGINAL UTILITY
As you consume additional units of a good, at some point each additional unit will begin providing less utility than the one before it.
Cost – Benefit Analysis
Question? :
What do you want RIGHT NOW?
Cost – Benefit Analysis
Follow up question? :
Why don’t you go get it?
Cost – Benefit Analysis
• We all make decisions in our own self-interest• All decisions come with certain trade-offs and alternatives• THERE IS NO SUCH THING AS A FREE LUNCH!!!Seinfeld example• Opportunity Cost: the next-best alternative given up when making a choice
What is the opportunity cost of going to college?
Opportunity Cost
VS.
VS. VS.
2008 Audit Exam
Marginal Cost
Marginal = Additional, next
Additional cost vs. additional benefit
We constantly engage in marginal analysis
Marginal AnalysisMarginal analysis (aka: thinking on the margin) making decisions based on incrementsExample:• When you decide to go to the mall you consider the
additional benefit and the additional cost (your opportunity cost).
• Once you get to the mall, you continue to use marginal analysis when you shop, buy food, and talk to friends.
• Since your marginal benefits and costs can quickly change your analyzing them every second.
• What if your ex-girlfriend shows up? The Point: You will continue to do something as long as the marginal benefit is greater than the marginal costCopyright
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Would you see the movie three times?
Notice that the total benefit is more than the total cost but you
would NOT watch the movie the 3rd time.
Thinking at the Margin
# Times Watching Movie
Benefit Cost
1st $30 $10
2nd $15 $10
3rd $5 $10
Total $50 $30
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Turn to a partner and share a recent example of marginal thinking in your life.
Economic Terminology
Utility =Marginal =
Satisfaction!Additional!
Allocate = Distribute!
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Paradox of ValueWater vs. DiamondsMonetary Value
◦Must be scarce◦Must give utility
Are diamonds scarce?Do they give utility?
Conspicuous consumption◦Examples?
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