Day 2

EQ: What is scarcity?

Agenda:-Voc. quiz-Collect signed syllabus-Q & A about the course-Lecture

Homework:- Complete Activity 2- Next 6 terms on flashcards-create personal pie chart

Today’s Quiz1.Economics.2.Scarcity3.Macroeconomics 4.Microeconomics 5.Consumers 6.Producers

Scarcity

UNIT I: BASIC ECONOMIC CONCEPTS

Length: 23 DaysChapters: 1-3

I WON THE LOTERY!

Now what do I do?

The 10 Principles of Economics

How People Make Decisions:1. People Face Tradeoffs2. The Cost of Something is What You Give Up to Get Something3. Rational People Think At the Margin4. People Respond to Incentives

How People Interact:5. Trade Can Make Everyone Better Off6. Markets Are Usually a Good Way to Organize Economic

Activity7. Governments Can Sometimes Improve Market Outcomes

How The Economy As A Whole Works:8. A Country’s Standard of Living Depends on its Ability to

Produce Goods and Services9. Prices Rise When the Government Prints Too Much Money10.Society Faces a Short-Run Trade-off between Inflation and

Unemployment

WHAT IS ECONOMICS IN GENERAL?

Economics is the study of _________.

• Economics is the science of scarcity.

• Scarcity is the condition in which our wants are greater than our limited resources.

• Since we are unable to have everything we desire, we must make choices on how we will use our resources.

• In economics we will study the choices of individuals, firms, and governments.

choices

SCARCITY MEANS THERE IS NOT ENOUGH FOR EVERYONE

Government must step in to help allocate resources

Economics DefinedEconomics-Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants.(Study of how individuals and societies deal with ______)

Examples:

You must choose between buying jeans or buying shoes.Businesses must choose how many people to hireGovernments must choose how much to spend on welfare.

scarcity

MICRO VS. MACROMicro Examines: Macro Examines:

Individual markets International trade

the behavior of firms (companies) and consumers

National markets

the allocation of land, labor and capital resources

Total output and income of nations

Supply and demand Total supply and demand of the nation

The efficiency of markets Taxes and government spending

Product markets Interest rates and central banks

Profit maximization Unemployment and inflation

Utility maximization Income distribution

Competition Economics growth and development

Resource markets

Market failure

C H A P T E R 1 T E N P R I N C I P L E S O F E C O N O M I C S

HOW PEOPLE MAKE DECISIONS

All decisions involve tradeoffs. Examples:

Going to a party the night before your midterm leaves less time for studying.

Having more money to buy stuff requires working longer hours, which leaves less time for leisure.

Protecting the environment requires resources that could otherwise be used to produce consumer goods.

Principle #1: People Face TradeoffsPrinciple #1: People Face Tradeoffs

C H A P T E R 1 T E N P R I N C I P L E S O F E C O N O M I C S

HOW PEOPLE MAKE DECISIONS

Society faces an important tradeoff: efficiency vs. equity

efficiency: getting the most out of scarce resources

equity: distributing prosperity fairly among society’s members

Tradeoff: To increase equity, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.”

Principle #1: People Face TradeoffsPrinciple #1: People Face Tradeoffs

C H A P T E R 1 T E N P R I N C I P L E S O F E C O N O M I C S

HOW PEOPLE MAKE DECISIONS

Making decisions requires comparing the costs and benefits of alternative choices.

The opportunity cost of any item is whatever must be given up to obtain it.

It is the relevant cost for decision making.

Principle #2: The Cost of Something Is What You Give Up to Get ItPrinciple #2: The Cost of Something Is What You Give Up to Get It

WHAT IS YOUNG RANDY’S OPPORTUNITY COST IN THIS PICTURE?

The Trade-off was 1 brunette for one blonde

C H A P T E R 1 T E N P R I N C I P L E S O F E C O N O M I C S

HOW PEOPLE MAKE DECISIONS

Examples: The opportunity cost of…

…going to college for a year is not just the tuition, books, and fees, but also the foregone wages.

…seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater.

Principle #2: The Cost of Something Is What You Give Up to Get ItPrinciple #2: The Cost of Something Is What You Give Up to Get It

PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN.

Marginal changes-In economics the term marginal = additional

People make decisions by comparing costs and benefits at the margin.

The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!

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

Basketball star LeBron James understands opportunity costs and incentives. He chose to skip college and go straight from high school to the pros where he earns millions of dollars.

Principle #4: People Respond to Incentives