What is Economics?

Economics is. . .

• Study of how we make decisions based on limited resources

The Basic Economic Problem - Scarcity

Scarcity Cont’d.

• Occurs when we don’t have enough resources to produce all the things we need/want

Needs versus Wants

• Needs – Things that are required for survival– Food, shelter, clothing

• Wants – Things we’d like to have, but can live without– New cars, designer

clothing, vacations

Economic Choices

• Choices we must make due to scarcity

• Do you choose to buy a brand new car and go without designer clothing, or do you buy a used car and have more money for nicer clothing?

Society’s Economic Choices

• The 3 Economic Questions:

– 1) What to produce• Should the nation produce weapons

to wage war, or should it provide services for the elderly and poor?

– 2) How to produce• Traditional oil for fuel (so we have to

drill in the Alaska Wildlife Refuge) OR use alternative fuel sources like solar power (so we have to invest in new equipment that we haven’t used before on a large scale)

Society’s Economic Problem Cont’d.

• 3) For Whom to Produce

• How will the goods that are produced be distributed to people?

• In the U.S., the price system determines who gets the things that are produced.

Who gets the new car? Who will go to the nice, new school?

Economic Models• Simplified

representations of the real world

• Economists use these models to:– Explain how the

economy works– Predict how the

economy might change– Test solutions to

questions for which there are no obvious or easy answers.

Keynes Economic Model of Excessive Saving

Economic Models, Cont’d.

• Models are based on assumptions

• Used to forecast economic activity

Making Economic Decisions

Trade-Offs• The alternative available when an

economic choice is made

Trade-Offs: Why Choose One Thing Over Another??

• Because doing one thing will cost you less, or give you more satisfaction, than doing another thing

• The cost is less than the benefit you gain

Examples of Trade-Offs• Using your own car all the time means more air

pollution – that’s a trade-off

( = dirtier air, more deaths each year for lung-related diseases, dirtier water, coastal flooding due to global warming, etc.)

• Cleaner air means less driving – that’s a trade-off, too

( = less convenience or using public transportation, like buses, instead of always driving your own car)

Opportunity Costs

• What you cannot buy or do when you choose to do one thing rather than another– It’s the cost of the next best

alternative use of money, time, or resources when one choice is made rather than another.

– Example: Going to college means that you pay tuition, books, etc. AND that do not get a salary/paycheck for the time you are in college

– NOTE: Opportunity Cost for NOT Going to College: College grads, on average, make twice as much money as high school grads, FOR THE REST OF THEIR LIVES! $$$$$$

Opportunity Cost, Cont’d.• Opportunity cost also include

all the discomforts and inconveniences linked to the choice you made (Example: cleaning the house does not JUST involve the cost of cleaning products. It also costs you in time and money that you would use for other things)

• It’s the cost of the next best use of your MONEY or TIME when you choose one thing over another

Measures of Costs• Suppose you own a

business – making anything you want

• How do you know how much of your product to make?

• How much should you not make? Ford Assembly Line

To Answer These Questions, You Must Look at Two Things. . . • Costs

• Revenues

Costs• Fixed Costs - Stay the same no

matter how many units you produce– For example, no matter how many

skateboards you make, your mortgage will still cost the same each month

• Variable Costs – These change with the number of units you produce– For example: If you decide make 500

extra skateboards a month, you will run your machinery for longer, and your electric bill will be higher each month

Total Costs

• Fixed Costs + Variable Costs = Total Costs

• Example:

FC = $1,000 (mortgage, your salary, etc.)+VC = $ 500 (electric bill, supplies, etc.)TC = $1,500

Begin notes Tues., April 23

• 1st Block

Marginal Costs – Cost of Producing Extras

• The added cost of making one more unit

• Example: If it costs $1,500 per month to produce 50 skateboards, how much more will it cost to produce 51 skateboards?

• If the marginal cost to make 1 more skateboard is $1,550, then the marginal cost is $50.

• Is it worth it to make 1 more skateboard? Depends on how much you can get people to pay for the skateboard

Marginal Revenue

• The extra money that results from selling one more unit

Cost-Benefit Analysis• Comparing the marginal costs and

the marginal benefits of a decision.

Cost-Benefit Analysis, Cont’d.

• If the marginal (extra) benefit is greater than the marginal (extra) cost, then you would take that action

• C/B Analysis - Used to answer the 3 basic economic questions– 1) How much to produce– 2) For whom to produce– 3) What to produce

Market Economy• a.k.a. Capitalism

• Economic system where private citizens own most, if not all, of the means of production.

• U.S. has a market economy

• People making economic decisions are looking out for their own interests.

Market Economy, Cont’d.

• Based on free enterprise – businesses compete for profit with little govt. interference

Obj: Describe how to be an economically smart citizen.

Your Role in the Economy

• Be informed – know how our economy works

• Understand incentives – rewards offered to try to get people to take certain economic actions– Ex: Credit cards offer

low interest rates to convince people to use their credit cards

Your Role, Cont’d.

• Understand the govt.’s role in the economy – Govt.’s job should be to maintain

competitive markets

– Govt. interference with businesses/prices/etc. should be very limited for the market to operate freely