Transcript Document 7421984

Chapter 1 – Introduction to Economics
Definition
Economics: The study of how society chooses to allocate its scarce
resources to the production of goods and services in order to satisfy
unlimited wants
Microeconomics: Branch of economics that studies
decision-making by a single individual, household, firm,
industry or level of government.
Macroeconomics: Branch of economics that studies
decision-making for the economy as a whole
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Chapter 1 – Introduction to Economics
• Marginal Analysis- The key to Economics
– Also called cost/benefit analysis
– Everything in economics is based on marginal analysis
• Positive and Normative economics
– A positive statement is one that is based in fact
– A normative statement is one that is based on opinion
• Fallacy of Composition
– A fallacy is something that is false
– Because it is true for one, it must be true for all
• Post Hoc Fallacy
– Post hoc, ergo propter hoc
– “After this, therefore because of this”
• Correlation vs. Causation
– Correlation means that things happen together
– Causation means that one caused the other
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Chapter 1 – Introduction to Economics
Problem of Scarcity
Human wants are forever greater than the available supply of time,
goods and resources.
Thus …
A decision must be made
Scarcity: The condition in which human
wants are forever greater than the available
supply of time, goods, and resources.
True or False: Wealth solves the problem of scarcity?
True or False: Scarcity is the same as Shortage?
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Chapter 1 – Introduction to Economics
SCARCITY? All societies, governments, families and
individuals must deal with the concept of scarcity.
Resources in society that are BOTH limited and
valued
Scarcity forces us to make choices about how to
best use our LIMITED resources to satisfy
UNLIMITED wants
ALL RESOURCES ARE SCARCE!!!!!
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Chapter 1 – Introduction to Economics
Scarce Economic Resources
Factors of Production (FOP): The resources used to create goods and services
Land: Any natural resource provided by nature.
Labor: The mental and physical capacity of workers to produce goods
and services.
Capital: Any physical man-made good used to produce other goods.
Efficiency: Producing the largest attainable output of a
desired quantity with a given set of resources; producing
at the lowest possible price
Productive Efficiency: Doing something in a manner
that yields the lowest average cost of production
Allocative Efficiency: Producing the correct combination of goods
and services
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Chapter 1 – Introduction to Economics
The 4 Factors of Production
Land (Natural Resources) - all things that come from nature
used in society. Ex. Sunlight, natural gas, lumber
Labor (Human Resources) – the input of humans in the
production process Ex. YOU-if you have a job, ME
Capital (Capital Resources) – Anything owned by a business
that is of value Ex. Desk, overhead, my laptop
Entrepreneurship – the organization of resources for
production-oversees the other factors Ex. Mrs. Perkins
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Chapter 1 – Introduction to Economics
Economic Way of Thinking
Economic Model: A simplified description of reality used to understand and
predict the relationship between variables.
Theories should be as simple as possible, but not more so.
- Albert Einstein
Ceteris Paribus Assumption: A Latin phrase means
while certain variables change, “all other things
remain unchanged.”
Association versus Causation: An economic
model is only valid when a cause-and-effect
relationship is stable over time, rather than
being an association that occurs by chance
and eventually disappears.
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Chapter 1 – Introduction to Economics
Types of Opportunity Costs
Explicit Costs: Money costs associated with a choice.
Implicit Costs: The loss associated with choosing an alternative.
Opportunity Cost = Explicit Cost + Implicit Cost
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Chapter 1 – Introduction to Economics
OPPORTUNITY COST
• All decisions involve trade-offs
• Opportunity cost is what we give up in
making a decision
• In economics we use the PRODUCTION
POSSIBILITIES CURVE to show one way
in which societies make choices and tradeoffs
• Our PPF will demonstrate the law of
increasing opportunity cost
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Chapter 1 – Introduction to Economics
The Three Basic Economic Questions
All societies, big or small, must answer these 3
questions about their resources
• What to produce?
• How to produce?
• For whom to produce?
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Chapter 1 – Introduction to Economics
Three Fundamental Economic Questions
1. What to Produce?
Guns vs. Butter
The problem of scarcity imposes a restriction
on the ability to produce everything we want
during a given period, so the choice to
produce “more” of a good requires producing
“less” of another good.
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Chapter 1 – Introduction to Economics
Three Fundamental Economic Questions
2. How to Produce?
Vs.
How do we mix technology and scarce resources
in order to produce goods and services?
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Chapter 1 – Introduction to Economics
Three Fundamental Economic Questions
3. For Whom to Produce?
Society must have a method to decide
who will be “rich” and who will be “poor”.
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Chapter 1 – Introduction to Economics
Production Possibilities Curve — Marginal Analysis
160
A
Production Possibilities Curve
A curve that shows the maximum
combinations of two outputs that an
economy can produce, given
available LLC.
Guns
Assumptions about the PPC
140
Unattainable
point
120
100
U
80
• Fixed Resources
• Fully Employed Resources
• Technology Unchanged
Z
B
C
Inefficient
point
60
40
PPC
20
D
20
40
60
80
Butter
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100 14 120
Chapter 1 – Introduction to Economics
Production Possibilities Curve — Movements and Shifts
Guns 160
Shifts in the PPC
Changes (increases) in the levels of a
country’s LLC will cause the PPC to
shift from PPC1 to PPC2
B
140
120
100
Movements along the PPC
Changes in the needs and wants
cause a country to choose a different
point along an existing PPC
C
A
80
60
40
20
PPC1
20
40
60
80
Butter
PPC2
100 15 120
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Chapter 1 – Introduction to Economics
Production Possibilities Curve — Law of Increasing Opportunity cost
Guns
160
A
Marginal Analysis
B
An examination of the effects of additions to 140
or subtractions from a current situation.
The Law of Increasing Opportunity Costs
The principle that the opportunity cost
increases as production of one output
expands.
This is responsible for the “bowed shape” of
the PPC.
120
C
100
80
60
Reasoning
• not all workers are equally suited to
producing one good , compared to
another.
• as we shift production levels of butter,
we gradually tap into the best gunmaking resources
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PPC
20
D
20
40
60
80
Butter
10016
120
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Chapter 1 – Introduction to Economics
Production Possibilities Curve — Effect of Investment on the Future PPC
Low-Investment country “A”
Capital
Goods
High-Investment country “B”
Capital
Goods
2000 and 2010 PPC
2010 PPC
2000 PPC
Kb
A
B
A
Ka
Ca
Consumer Goods
Cb
Cc
Consumer Goods
Country A produces only enough capital Ka to replace existing capital being worn out. Without greater
capital and assuming other resources remain fixed, Country A is unable to shift its PPC outward
Country B produces Kb, which is more than the amount required to replenish its depreciated
capital. In the year 2010, this expanded capital provides Country B with the extra production
capacity to shift its PPC outward. If Country B chooses point B, it has the production capacity to
increase the amount of consumer goods from Cb to Cc without producing less capital.
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