INTRODUCTION TO INTRODUCTION TO ECONOMICSECONOMICSBasic conceptsBasic concepts

CONTROLLING CONCEPTS AND CONTROLLING CONCEPTS AND REALITIESREALITIES

Wants v. needs Wants v. needs – which is – which is which and how to choose?which and how to choose?

EconomicsEconomics – study of – study of howhow resources are used, resources are used, decisions, buying, selling, decisions, buying, selling, etc.etc.

Micro v. macroMicro v. macro – which is – which is which?which?

Scarcity of resources Scarcity of resources – the – the driving force behind all of it. driving force behind all of it. Because Because nono resources are resources are limitless, their use must be limitless, their use must be decided upon and manageddecided upon and managed

SCARCITY, CHOICE AND OPPORTUNITY SCARCITY, CHOICE AND OPPORTUNITY COSTCOST

Wants & needs + limited resources = Wants & needs + limited resources = scarcityscarcity

individuals and societies must individuals and societies must choose between options to decide:choose between options to decide: What to produce What to produce – e.g. consumer goods – e.g. consumer goods

or heavy industry and/or militaryor heavy industry and/or military How to produce itHow to produce it – higher tech – higher tech

production v. increased pollution and/or production v. increased pollution and/or job lossjob loss

For whom to produce itFor whom to produce it – by price system – by price system or central control or combination of bothor central control or combination of both

All societies make these choices, and All societies make these choices, and the decision can have far-reaching and the decision can have far-reaching and profound effectsprofound effects U.S. vs. U.S.S.R. during the Cold WarU.S. vs. U.S.S.R. during the Cold War Wealth produced by capitalism – making Wealth produced by capitalism – making

profits on consumer goods makes the pie profits on consumer goods makes the pie biggerbigger

THE U.S. OUTSPENDS THE U.S.S.R. ON MILITARY BUDGET BY PRODUCING MORE CONSUMER GOODS

Soviet GDP

U.S. GDP

MAKING DECISIONS – FORCE BY MAKING DECISIONS – FORCE BY SCARCITYSCARCITY

Opportunity cost Opportunity cost - - picking one thing over picking one thing over another [since you another [since you can’t do both]can’t do both] What trade-offs have What trade-offs have

you had to make?you had to make? Opportunity cost is not Opportunity cost is not

measured in measured in $$ $$ - but in - but in what is given up in what is given up in order to do it. E.g. if I order to do it. E.g. if I have resources to make have resources to make 5 pies OR 8 cakes, the 5 pies OR 8 cakes, the opportunity cost of opportunity cost of making 5 pies = 8 making 5 pies = 8 cakes.cakes.

HOW TO CHOOSE – COST V. REVENUEHOW TO CHOOSE – COST V. REVENUE Some study will need to Some study will need to

be done to find out if be done to find out if making this thing, and making this thing, and how many to make is how many to make is worthwhile – i.e. will it worthwhile – i.e. will it make enough money to be make enough money to be worth itworth it

Key study is a Cost-Benefit Key study is a Cost-Benefit AnalysisAnalysis The study looks at money The study looks at money

going out [cost] v. money going out [cost] v. money coming in [revenue] to coming in [revenue] to answer the questionanswer the question

Both costs and revenues Both costs and revenues come in several types and come in several types and must be understood if I must be understood if I want to avoid losing moneywant to avoid losing money

CB ANALYSIS – PART ONE, COSTSCB ANALYSIS – PART ONE, COSTS Types of Types of costscosts [ [

money/resources spent to money/resources spent to produce]produce] FixedFixed – –

Stay the same regardless of # of Stay the same regardless of # of units producedunits produced

what examples can you think of?what examples can you think of? Variable –Variable –

Costs vary with # of units producedCosts vary with # of units produced examples?examples?

Total cost Total cost – add the first two– add the first two Marginal cost Marginal cost ––

The cost for producing one additional The cost for producing one additional unitunit

Very helpful in determining whether Very helpful in determining whether or not to make moreor not to make more

CB ANALYSIS – PART TWO, REVENUESCB ANALYSIS – PART TWO, REVENUES RevenueRevenue = money = money

coming in. Two coming in. Two categories:categories: Total revenue Total revenue = # units = # units

sold X avg. price per unitsold X avg. price per unit Marginal revenueMarginal revenue – how – how

will total revenue change will total revenue change by sale of one more unit? by sale of one more unit? The amount often The amount often changes as # of items changes as # of items produced increasesproduced increases

Benefit – action taken Benefit – action taken anticipating satisfactionanticipating satisfaction Marginal benefit – Marginal benefit –

additional satisfaction additional satisfaction from one more producedfrom one more produced

COST – BENEFIT ANALYSIS – SHOULD I COST – BENEFIT ANALYSIS – SHOULD I MAKE MORE?MAKE MORE?

CB analysis – comparing marginal cost with marginal benefit If marginal cost > marginal benefit, then

don’t do it [unless you actually enjoy losing money]

Often the benefits will decrease as more is produced – this is called diminishing marginal benefit