Unit 1

What is Economics?

• The Basics

Economics

• The study of the use of scarce resources that have alternative uses

Scarce resources – • Natural Resources (land, water, oil, etc.)• Human Resources (workers, entrepreneurs, etc.)• Capital Resources (money, machinery, etc.)Alternative uses –• Wood (paper, furniture, houses, etc.)• Steel (automobiles, desks, etc.)• Money (buying more inventory, hiring more workers, how

much to advertise, etc.)

Branches of Economics

Micro=individual or Little Picture

Macro=Whole or Big Picture

Positive vs. Normative Economics•

Positive And Normative Economics - Video | InvestopediaPositive vs Normative Economics

7 Principles That Guide an Economic

Way of Thinking

Principle #1:Scarcity Forces Tradeoffs

• Scarcity – not enough resources to do everything we would want to do

• Those resources have alternative uses• When you choose to use a given resource for

something, you are unable to use that resource for anything else

• Whenever you choose one thing over another, you are making a tradeoff

Scarcity

TANSTAAFL• “There Ain’t No Such Thing As A Free

Lunch”• Every choice someone makes involves

tradeoffs, whether they realize it or not• Example: you get a free lunch– Lunch might be free to you.– Someone, however, had to pay for that lunch.– That someone had to give up something (payment

for lunch, eating that lunch him/herself, etc.) in order for you to get it for free.

Opportunity Cost• The “value” of the next most likely choice for the use of a

resource that is given up when making a choice• Example:• Imagine you have $5.00. You could do the following with it (in

this prioritized order):• Spend it on a snack at Sheetz/Handy Mart• Spend it on a snack at a fast food restaurant (McDonald’s,

Arby’s, KFC, Taco Bell, etc.) on their Value Menu• Spend it on admission to the next home sporting event• Save it to buy gas later in the weekBy choosing to spend it on a snack at Sheetz/Handy Mart, the

opportunity cost is not being able to spend it at one of the fast food restaurants (the second most likely choice).

Opportunity Cost

Principle #2:Costs Versus Benefits

• The scarcity-forces-tradeoffs principle forces us to make choices

• Economists assume that individuals make choices based on expected costs and benefits– Costs: what you spend in time, money, or other

sacrifices to get your choice– Benefits: what you gain from something in terms of

money, time, experience, or other improvements in your situation

• People choose something when the benefits of doing so are greater than the costs

Cost-Benefit AnalysisExample #1: You have $20 and are considering spending it on gas for your car.Costs:• Won’t have money to go out on a date this weekend or other

entertainmentBenefits:• Go where you want to go & Won’t have to get a ride from

parents

Example #2: Start my own business.Costs: Come up with start up funding and may to take out a loanLots of time and energy & not guranteed to make $$ & High riskBenefits:Will be own boss & Make all of the decisionsPride of ownership & It’s your passion & You reap the $$ rewards

Video & Assignment

Decision Making:Scarcity, Opportunity Cost, & You

And Video http://www.learner.org/series/econusa/video/?pid=2466&uid=14&unit=Resources%20and%20Scarcity

Principle #3:Thinking at the Margin

• Thinking at margin is deciding to add (or subtract) one more unit to (or from) what we already have

• Examples

• Compare marginal costs and marginal benefitsExample #1: Getting another pair of shoes

• Marginal Costs:• Having as much money to put gas in car• May not be able to have money to go out on a date• If saving for a goal, may not be able to put as much toward

that goalMarginal Benefits:• Shoes may be more comfortable than other pairs you have• Provides more flexibility in putting together outfits to wear• May be more fashionable (status symbol)

Diminishing Marginal Utility• Marginal Utility– The extra satisfaction or benefit you will get from

an increase of an additional unit of a good or service

– Essentially your perceived difference between the marginal benefit and marginal cost from that additional unit

• Law of Diminishing Marginal Utility

– “You can have too much of a good thing”

In-Class Activity

Marginal Analysis

Production TableNumber of

Workers Total OutputMarginal Output of Additional Worker

1234567

How Clean is Clean Enough?Statement 1: Local Lake is a disaster. It was once a

beautiful, clean area where you could drink the water safely. Now it is dirty from overuse, soil runoff, and overflow from septic tanks. The County Council should clean the lake completely: 100% clean. The technology and know-how are available. There is no excuse for not doing the job completely.

Statement 2: We can clean up most of the pollution in the lake for 1/3 of what it would cost to clean it completely. It may be too costly to clean the lake completely. Resources are scarce. If the County Council overspends for the environment, it can accomplish less in other areas that are important, too.

Principle #4:Incentives Matter

• Incentive – something that motivates a person to take a particular course or action

• People respond to incentives in generally predictable ways

• Incentives can be both positive (rewards/benefits) and negative (punishments/costs)– Negative incentives sometimes called disincentives

In-Class Activity

Why People Trade

Principle #5:Trade Makes People Better Off

• Adam Smith quote “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”

Retrieved from http://app.discoveryeducation.com/search?Ntt=adam+smith on January 30, 2014.

Principle #6:Markets Coordinate Trade

• Market – any arrangement that brings together buyers & sellers to do business with each other

• When markets operate freely or with limited government interference, buyers & sellers can trade with each other until both are satisfied with their sales & purchases– Result is efficient market that serves everyone’s

interests without guidance from a person or institution

• Markets usually do better than anyone or anything else at coordinating exchanges between buyers & sellers

• Free Market Economy

Principle #7:Future Consequences Count

• Decisions made today have consequences not only for today but also for the future– Many only look at immediate costs & benefits– Must also consider long-term effects

• Law of Unintended Consequences– Actions of people and governments always have

effects that are not expected– Economists spend much of their time trying to

predict these unintended consequences

Example:A few years back, the Winchester City Council passed an increase in the tax per pack on cigarettes, claiming it would raise $X amount of revenue (based on current cigarette sales volume). After a year or so, the amount of tax revenue from cigarette sales by the city did go up, but not nearly as much as was estimated when the tax was proposed. What actually was happening was that people were going to buy their cigarettes in the county. Although the amount of tax collected did go up because more was being collected per pack of cigarettes sold, less cigarettes were being sold in the city. This hurt those business owners selling cigarettes because this drove sales away from them, and they made less money from cigarette sales (less overall revenue to pay rent, pay/hire workers, profit, etc.). Those arguing against raising the prepared meal (i.e. restaurant) tax are arguing that this raise would have a similar effect on those small businesses serving food.