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What IS Economics?
Economics is the study of how people seek to satisfy their needs and wants by making choices.
What is a need? A need is
something necessary for survival. Examples:
What is a want? A want is an item
we desire but is not essential to survival. Examples:
What do we mean by opportunity cost?
When we decide to do something, one of the things we could have done is usually better than the others. This is the most likely option.
This second best thing is called the opportunity cost.
Opportunity cost In other words, you
could have slept in instead of coming to school today. You chose to come to school. The opportunity cost was sleeping in.
So if economics is the
study of how people seek to satisfy their needs and wants by making choices,
why do people need to make choices at all?
Scarcity
Scarcity Limited quantities
of resources to meet unlimited wants.
A limit is ALWAYS reached.
Scarcity always exists because our needs and wants are always greater than our resources.
Scarcity is not the same as shortage. A shortage is when producers cannot or
will not offer goods or services at current prices May be long term or short term, but will or
can end
Two important terms Goods
Physical objects that are sold
Services Actions or
activities that one person performs for another and is paid for
Resources –those things used to create goods and services They are also
called Factors of Production
Land Labor Capital
Physical Human
Land All natural
resources used to produce goods and services Includes the fertile
land itself and anything that comes from the land including such things as forests, minerals, and water
Labor The effort a
person devotes to a task for which he or she is paid
This person works for someone else – a company
Includes the people who are working or looking for work
Entrepreneur
Person who puts land, labor, and capital together, the factors of production, to create new goods and services
Physical Capital Also called capital
goods - Inventory
Buildings, equipment, and supplies needed to run a business
Physical capital can make us more productive Example: Washing dishes
for your family: man vs machine By hand: 21 meals per
week, 2 people working, 30 minutes per meal is 21 hours per week of work
A dishwasher costs $400 but now dishes take only 15 minutes per meal for one person, a savings of 15 ½ hours per week
Extra time15 ½ hours per week for other activitiesMore knowledgeBy learning to use a dishwasher family members become more able to use other appliances More productivityWith extra time and knowledge they can do extra chores or activities that will help the family
Human capital The knowledge
and skills a worker gains through education and experience
Cost What it takes to get or
do something (what you give up)
Benefit
What is gained when a choice is made
Incentives Things that get
people to do things
Can be monetary incentives
Or non-monetary incentives
Consequence
What happens when you make a choice
Trade-offs Trade-offs are all the
alternatives we give up whenever we choose one course of action over another.
Every decision we make involves trade-offs.
Trade-offs Individuals make
trade-offs but businesses also do.
Decisions made about land, labor, and capital involve trade-offs.
For example, if a farmer plants broccoli, he cannot plant corn.
Society and trade-offs Countries also make
decisions that involve trade-offs.
This is called guns or butter.
This means that materials used for military purposes are not available for domestic purposes.
Opportunity cost Remember: When
you make a decision, you give up something – this is the opportunity cost.
Or as an economist might say, “Choosing is refusing.”
Opportunity cost Some decisions are
easy but sometimes choosing between alternatives can be hard.
Margins But is a decision
always just all or nothing?
Instead of sleeping all day and not coming to school at all, what if you wanted to sleep five more minutes? What about an extra half hour?
This is called the margin.
Decision making at the margin Comparing the
opportunity cost and the benefits at the margin helps make good decisions.
At what point do the costs outweigh the benefits?
The margin is where you consider the cost of one more.
Thinking at the margin-using a grid can help make the best choiceOptions Benefit Opportunity
Cost
1st hour of extra study time
Grade of C on test
One hour of sleep
2nd hour of extra study time
Grade of B on test
Two hours of sleep
3rd hour of extra study time
Grade of B+ on test
Three hours of sleep
You could make an opportunity grid.
Alternative 1
Alternative Alternative 2 3
Benefits
Decision
Opportunity cost
Benefits given up (cost)
Thinking at the margin Deciding by thinking
at the margin is like any other decision
What will you sacrifice? What will you gain?
When the opportunity cost outweighs the gain, it’s time to stop.
One more thing…. TANSTAAFL
There ain’t no such thing as a free lunch!
Every choice has an opportunity cost!