Unit 1: Basic

Economic ConceptsLength: 2 Weeks

Chapters: 1 and 2

What is Economics?

Economics is the study of _________.

• Economics is the science of scarcity.

• Scarcity means that we have unlimited wants

but limited resources.

• Since we are unable to have everything we

desire, we must make choices on how we will

use our resources.

choices

In economics we will study the choices of

individuals, firms, and governments.

Textbook DefinitionEconomics- Social science concerned with the

efficient use of scarce 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 hire

Governments must choose how much to spend on

welfare.

scarcity

Micro vs. MacroMICROeconomics-

Study of small economic units such as

individuals, firms, and industries (ex: supply

and demand in specific markets, production

costs, labor markets, etc.)

MACROeconomics-Study of the large economy as a whole or

economic aggregates (ex: economic growth,

government spending, inflation,

unemployment, international trade etc.)

Positive Economics Economic analysis is used to answer questions

• about the way the world works.

• that have definite right and wrong answers.

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.

Normative EconomicsEconomic analysis that involves saying how the

world should work.

Positive vs. Normative Positive - Based on facts. Avoids value judgments

(what is). *about description*

Normative - Includes value judgments (what ought to

be). *about prescription*

1. How much revenue will a bridge toll yield next year?

2. How much would that revenue increase if the toll were

raised from $1.00 to $1.50?

3. Should the tolls be raised, bearing in mind that a toll

increase would likely reduce traffic and air pollution

near the bridge but impose some financial hardship on

frequent commuters?

Which of the following

statements is/are normative?

1. The price of gas is rising.

2. The price of gas is too high.

3. Gas prices are expected to fall in the near

future.

5 Key Economic Assumptions1. Society’s wants are unlimited, but ALL resources

are limited (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.

Analyzing Choices

Joe’s DilemmaJoe doesn’t know what he should do after he graduates from

high school. He just got his acceptance letter from UCLA

(go Bruins!) but he is considering taking a year off to work

as an apprentice under a local aging artist. He also recently

read an article about taking a gap year. He is considering a

community development program in Brazil and then doing

a little backpacking South America.

What should Joe do?

Trade-offs and Opportunity CostALL decisions involve trade-offs.

The most desirable alternative given up as a

result of a decision is known as opportunity cost.

Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.

(Examples: going to the movies)

What are trade-offs of deciding to go to college?

What is the opportunity cost of going to college?

What is the opportunity-cost of this decision?

Thinking at the MarginDecisions are not always “all or nothing” but rather require

us to decide how much more or less to do.

Marginal Analysis = a decision that made by considering the marginal cost (MC) and marginal benefit (MB) of consuming or producing one more unit or one less unit.

Marginal = additional

MB ≥MC = Do it!

MB < MC = Skip it!

Thinking at the Margin Problems1. You own a 100-spot parking garage in downtown Chicago.

You have charged $1.00 per hour for parking for a long

time, and your lot is always full during the business day

(9:00 AM to 5:00 PM). If you raise your price to $1.50

hour, only 65 people will use your garage. If the price is

$2.00 per hour only 54 people will park. At $2.50 per hour

only 45 people will use your garage.

• Where should you set your price? Why?

$1 x 100 spots = $100

$1.50 x 65 = $97.50

$2 x 54= $108

$2.50 x 45= $112

• An airline is trying to decide how much to charge

passengers who fly standby. It costs the airline $100,000 to

fly the 200-seat plane from New York to Los Angeles. The

plane is about to take off with 24 empty seats. A standby

passenger is waiting by the gate, but he only has $200.

• Should the airline sell him a seat for that amount? Why or

why not?

Thinking at the Margin Problems

• You own a store with 10 employees who collectively earn

$350,000 per year in wages, for an average of $35,000 per

employee. Your store takes in $500,000 per year in

revenue, so each worker is earning an average of $15,000

in profit for you. Adding an additional employee will raise

total wage costs to $385,000 per year, while revenues rise

to $537,000; each worker is now making you an average

profit of $13,818 per year.

• Should you hire the eleventh worker? Why or why not?

• Yes, you are still making $2,000 more with that additional

employee.

Thinking at the Margin Problems

Unit 1: Basic

Economic Concepts““Econ, Econ,

EconEcon””

EconEcon

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Economic

TerminologyUtility =

Marginal =

Satisfaction!

Additional!

Allocate = Distribute!

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Scarcity vs. Shortages

•Shortages occur when producers will not or cannot

offer goods or services at current prices. Shortages

are temporary.

•Scarcity occurs at all times for all goods.

Price vs. CostWhat’s the price? vs. How much does that cost?

Price= Amount buyer (or consumer) pays

Cost= Amount seller pays to produce a good

InvestmentInvestment= the money spent by BUSINESSES to

improve their production

Ex: $1,000 new computer, $1 Million new factory 26

Services= actions or activities that one

person performs for another (teaching,

cleaning, cooking)

Goods= physical objects that satisfy needs and wants

Give examples…

•Consumer Goods- created for direct

consumption (example: pizza)

•Capital Goods- created for indirect

consumption (oven, blenders, knives, etc.)

•Goods used to make consumer goods

Goods vs. Services

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Accountants vs. Economists

Accountants look at only EXPLICIT COSTS.

•Explicit costs are the traditional “out-of pocket

costs” of decision making.•Ex: Going to Disneyland

Economists look at the EXPLICIT COSTS and the IMPLICIT COSTS.

•Implicit costs are the opportunity costs such as

forgone time and forgone income.

•Ex: Peyton Manning leaves the NFL to open

a taco shop. 28

The 4 Factors of

Production

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The Four Factors of Production

Entrepreneurship

Capital

Labor

Land

•Producing goods and services requires the use of

resources- DUH!.

•ALL resources can be classified as one of the

following four factors of production:

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Land = All natural resources that are used to produce

goods and services. Anything that comes from

“mother nature.” (Water, Sun, Plants, Oil, Trees,

Stone, Animals, etc.)

The Four Factors of Production

Labor = Any effort a person devotes to a task for which

that person is paid. (manual laborers, lawyers,

doctors, teachers, waiters, etc.)

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Two Types of Capital:1. Physical Capital- Any human-made resource that is

used to create other goods and services (tools, tractors, machinery, buildings, factories, etc.)

2. Human Capital- Any skills or knowledge gained by a worker through education and experience (college degrees, vocational training, etc.)

The Four Factors of Production

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Program for International Student Assessment (PISA) is a worldwide

evaluation of 15-year-old school children's scholastic performance

• Entrepreneurship= ambitious leaders that combine

the other factors of production to create goods and

services.

• Examples-Henry Ford, Bill Gates, Inventors, Store

Owners, etc.

The Four Factors of Production

Entrepreneurs:

1. Take The Initiative

2. Innovate

3. Act as the Risk Bearers

So they can obtain _________.

Profit= Revenue - Costs

PROFIT

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The Factors of Production

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The Four Factors of Production

You decide to order a pizza to satisfy your wants. First,

you picked up the telephone and gave your order to the owner

that entered it into her computer. This information came up on

the chief baker’s monitor in the kitchen and he assigned it to

one of his cooks. The cook was busy mixing dough out of salt,

flour, eggs, and milk.

The cook finished mixing dough, washed his hands in

the sink, and prepared your pizza using tomato sauce, cheese,

and sausage. He then placed the pizza in the oven. Within 10

minutes the pizza was cooked and placed in a cardboard box.

The delivery person then grabbed your pizza, jumped in the

company car, and delivered it to your door.

Classify the Factors of Production in the following scenario:

The Four Factors of ProductionClassify the Factors of Production in the following scenario:

You decide to order a pizza to satisfy your wants. First,

you picked up the telephone and gave your order to the owner

that entered it into her computer. This information came up on

the chief baker’s monitor in the kitchen and he assigned it to

one of his cooks. The cook was busy mixing dough out of salt,

flour, eggs, and milk.

The cook finished mixing dough, washed his hands in

the sink, and prepared your pizza using tomato sauce, cheese,

and sausage. He then placed the pizza in the oven. Within 10

minutes the pizza was cooked and placed in a cardboard box.

The delivery person then grabbed your pizza, jumped in the

company car, and delivered it to your door.