Basic Economic ConceptsScarcity, Opportunity Cost & PPC

Key Assumptions in EconomicsPeople are rationally self-interested

They seek to maximize their utility (happy points)

People generally make decisions at the margin

They weigh the marginal benefit against the marginal cost of a decision

Ceteris Paribus assumption

Economists hold all other factors constant, except for what’s being considered

Basic Economic VocabularyEconomics

The study of choices people make to satisfy their needs and wants

Microeconomics

The study of how individuals and firms deal with scarcity

Macroeconomics

The study of how society as a whole deals with scarcity

Basic Economic VocabularyGoods

Physical objects that can be purchased

Services

Actions or activities performed for a fee

Consumers

People who purchase goods and services

Producers

People who produce g/s

People who supply goods and services

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Needs

Necessities for survival

Wants

Goods and services consumed beyond what is necessary for survival

Resources / The Factors of Production

Economists classify resources into 4 categories

1. Land

Natural resources

The payment for Land is RENT

2. Labor

Human resources

The payment for Labor is WAGES

3. Capital (a product of Investment)

Tools, machines, factories

The payment for Capital is INTEREST

4. Entrepreneurship

Risk-taker producing a profitable combination of land, labor and capital in new ways in order to make profit.

The payment for Entrepreneurship is PROFIT

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SCARCITYEconomics is the study of limited resources

and unlimited needs and wants

Scarcity leads to making choices

Trade-offs are faced when it comes to using available resources.

Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”

Every decision has an opportunity cost

Marginal decision making = the result of an additional change

Marginal benefits vs. marginal costs is the basis for making the decision

Examples:

1 more hour of sleep vs. eating breakfast

Part time job vs. goofing off

College vs. full time job

SCARCITY

Opportunity CostOnce a resource or factor of production has been

put to productive use an opportunity cost is incurred.

Opportunity cost is the next best alternative use for a resource.

Ex. If the 3 cups of flour are used to bake bread, then the opportunity cost is the cake that could also have been baked with the 3 cups of flour.

No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.

TINSTAAFL

There is no such thing as a free

lunch.

Everything has a cost.

Agenda 9/41. PPC notes/ practice

2. Circular Flow quiz?

3. HW instructions

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PPC

Illustrates scarcity, choices & opportunities costs

Points on the curve show production amounts possible for 2 goods

Capital goods

Consumer Goods

Point A

The PPC = The Production Possibilities CurveThe PPC = a graph showing all of the possible

combinations of output for an economy fully employing all of its resources in producing 2 goods.

Production Possibilities Schedule

Good A B C D

Coconuts 0 9 15 30

Fish 40 28 20 0

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(draw on board)

Capital Goods

Consumer Goods

X = Point possible,

but inefficient

Point AY = Point Not Possible

Review: SCARCITYEconomics is the study of limited resources

and unlimited needs and wants

Scarcity leads to making choices

Opportunity Cost is what is sacrificed when one choice is made over the “next best alternative”

Every decision has an opportunity cost

Marginal decision making = the result of an additional change

Marginal benefits vs. marginal costs is the basis for making the decision

Examples:

1 more hour of sleep vs. eating breakfast

Part time job vs. goofing off

College vs. full time job

Review: SCARCITY

CAPITALISM – MARKET ECONOMYOwnership of all resources is in the hands of

individuals

Decision making is by individuals in the market

Voluntary exchange of goods and services

Self interest influences all decisions – to the benefit of society

Competition is the regulating mechanism

CAPITALISM – MARKET ECONOMY

Markets and Prices coordinate the millions of decisions

System is facilitated by:

Specialization

Use of money

Technology

Active, but limited government involvement

CAPITALISM – MARKET ECONOMY

Basic Questions every society must ask:

What goods & services to produce?

How to produce?

How much to produce?

For whom to produce?

How will changes be implemented?

Agenda 9/5

1. Turn in HW

2. Circular Flow Quiz

3. Fast Food reading

4. Test review/practice

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