The Major Ideas

That Drive The

Concept of

Economics

Michelle Holmes

Economics

Sept.27, 2011

What major ideas drive the

concept of economics?

• Scarcity vs. Needs

• Opportunity Cost

• Marginal Cost

• Marginal Benefit

• Incentives

What is the causal

relationship between

scarcities and needs?

• People have unlimited wants but

resources are limited.

• These resources are the input of

production: land, labor, and capitol.

– Example: Currently people want jobs but

there aren’t enough jobs for everyone.

• Because of scarcity, economic

decisions must be made in order to best

decide how to divide resources

efficiently.

Choices

• People must make choices between

different items because necessary

resources may be limited.

• These decisions are sometimes made

by giving up one want to satisfy another.

What are Opportunity

Costs?

• Opportunity Cost: The money or other

benefits lost when pursuing a particular

course of action instead of a mutually

exclusive alternative.

– For example, you spend time and money going

to a movie, you cannot spend that time at

home reading a book, and you cannot spend

the money on something else. If your next-best

alternative to seeing the movie is reading the

book, then the opportunity cost of seeing the

movie is the money spent plus the pleasure

you forgo by not reading the book.

What are

Marginal Costs? • Marginal Costs: At each level of

production includes any additional costs

required to produce the next unit.

– For example, if producing additional

vehicles requires, building a new

factory, the marginal cost of those

extra vehicles includes the cost of

the new factory.

What are Marginal

Benefits?

• Marginal Benefits: The additional

satisfaction or utility that a person

receives from consuming an additional

unit of a good or service.

– For example, Consumers make

rational decisions. If two products

are of equal benefit to a consumer,

then he or she will choose the

cheaper product. If two products are

the same price, the consumer will

choose the one that provides the

higher benefit.

What are incentives and

how do they cause changes

in behavior?

• Incentives are rewards that motivate

desirable actions.

– Examples

• Positive economic incentives

reward people financially for

making certain choices and

behaving in a certain way.

• Negative economic incentives

punish people financially for

making certain choices and

behaving in a certain way.

Vocab:

• Scarcity: Insufficiency or shortness of

supply.

• Seasonal Scarcity: All consumable

produce is grown in cycles.

• Incentives: Something that incites or

tends to incite to action or greater effort,

as a reward offered for increased

productivity.

• Total Cost: Describes the total

economic cost of production and is

made up of variable costs.

• Variable Cost: A cost of labor, material

or overhead that changes according to

the change in the volume of production

units.

Vocab:

• Fixed Cost: Are business expenses that

are not dependent on the level of goods

or services produced by the business.

• Transaction Cost: Is a cost incurred in

making an economic exchange.