the basics of economics (chapter 1)pnhs.psd202.org/documents/sbarber/1503402308.pdf · 3 are these...

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The Basics of Economics (Chapter 1)

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“Billions of people could benefit from

better economic policies. Millions are

dying because of bad ones.

Sometimes the logic of economics is

so compelling that it’s impossible for

economists not to take a stand.”

• Tim Hartford (author of The Undercover

Economist)

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EconomicsThe study of how society

manages its scarce resources

by making decisions.

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Are these scarce?

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

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Yes! All goods and services are scarce!!!


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Scarcity

Since all resources in the world are limited, we

are limited into how much we can produce.


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Good Service

To get the benefit, you

must actively use it

To get the benefit,

someone or something

does it for you

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So back to what economics is…


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Lets pretend you have found a new

tropical island that is inhabited by strange

individuals...These people need so much

help that they gave you the power to

make all of their societal decisions.

Currently, the society relies on

themselves and their surroundings.

Based on all of this info, what are three

questions to ask yourself when deciding

what is best for society?

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MICROECONOMICS is based on the same concept but the decisions that

are made are on a much smaller scale…(Individual, Firms, etc).


© 2007 Thomson South-Western

1. Key Economic Questions

Society faces many decisions:

What goods and services will be

produced?

Who will produce the goods and services?

Who will consume the goods and

services?


2. The Factors of Production

LAND LABOR CAPITAL

The resources that are used to produce

goods and services


3. Physical vs. Human Capital

• Physical Capital are the man made assets that

are used in production.

• Ex. shovel, nail, plastic, etc.

• Human Capital is the knowledge that is

needed in production.

• Ex. a doctor administering an X-Ray, Mr. Barber

teaching the most awe-inspiring lessons in the

history of education.


4. Market

•A group of buyers (consumers) and sellers

(producers) of a particular good or service


5. The People Who Make Up A Market

• Households

• Consumer of goods and services.

• They ARE the factors of production.

• Firms

• Producers of goods and services.

• They USE the factors of production.


Household or Firm?


6. Society and Scarce Resources

• The management of society’s resources is

important because resources are scarce.

• Scarcity. . . means that society has limited

resources and therefore cannot produce all the

goods and services people wish to have.


Basic Principles of Economics


Principle #1: People Face Trade-offs

• Also known as costs

• What you give up because of a decision

• Efficiency v. Equity

• Efficiency means society gets the most that it can

from its scarce resources.

• Equity means the benefits of those resources are

distributed evenly among the members of society.

Brain Drain!

If society decides to be more equitable,

what will happen to efficiency?


Result…

Equity Efficiency


Principle #2: The Cost of Something Is What You Give Up to Get It.

• Basketball star

LeBron James

decided to give up

college and play pro

basketball. So, what

was his cost? Do you

think that was the

correct decision?


Opportunity Cost

The MOST desirable

alternative that is given

up because of a decision


Which is the opportunity cost of this decision?

You

decide to

buy a

$50,000

car.


High Opportunity Cost Low Opportunity Cost

Should I rob a bank?

Should I steal one

strawberry from the

produce section at

Jewel?


• Marginal changes are small, incremental

adjustments to a decision.

People make decisions by comparing

costs and benefits at the margin.

Principle #3: Rational People Think at the Margin.

Example: Should I hire one more additional worker?


Principle #4: When making decisions, people use the Cost Benefit Analysis

• When thinking at the margin, you only add one

more unit if the marginal benefit (MB) >

marginal cost (MC).

• Keep adding units until the MB = MC

• MC should never be greater than the MB.

• Benefits can also be called incentives.


What if….

Marginal Cost = $2,000

Marginal Benefit = You play the

game for a month and quickly lose

interest (is that really worth $2,000?)


Principle #5: Trade Can Make Everyone Better Off.

• Trade allows people to specialize in what they

do best.


Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

• A market economy is an economy that allocates

resources through the decentralized decisions of

many firms and households as they interact in

markets for goods and services.

I will let the citizens

decide how to answer

the key economic

questions

Hey Congress, that’s

smart because I am

only going to produce

what keeps my business

running. So, most of

society will get what

they want.


Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

• Adam Smith made the “invisible hand”

theory.

• Because households and firms look at prices

when deciding what to buy and sell, they

unknowingly regulate the market.


Principle #7: Governments Can Sometimes Improve Market Outcomes.

• Markets work only if property rights are

enforced.

• Property rights are the ability of an individual to

own and exercise control over a scarce resource

• Market failure occurs when the market fails to

allocate resources efficiently.

• When the market fails (breaks down)

government can intervene to promote efficiency

and equity.


Principle #7: Governments Can Sometimes Improve Market Outcomes.

• Market failure may be caused by:

• an externality, which is the impact of one person or

firm’s actions on the well-being others.

• market power, which is the ability of a single

person or firm to unduly influence market prices.

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