The Economic The Economic Way of ThinkingWay of Thinking

What is Economics about?What is Economics about? A.A. how people make choiceshow people make choices B.B. First principle of First principle of

EconomicsEconomics 1.1. people have people have

unlimited wants unlimited wants and and desiresdesires

C.C. Second principle of Second principle of EconomicsEconomics

1.1. people live in a world people live in a world of of limited resourceslimited resources

D.D. Third principle of Third principle of EconomicsEconomics

1.1. given the above, people given the above, people have have to make choicesto make choices

II.II. The Economic Problem The Economic Problem (question to be (question to be answered)answered)

A.A. What goods and services What goods and services should should be produce?be produce?

B.B. How should goods and How should goods and services services be produced?be produced?

C.C. Who should get the goods Who should get the goods and and services produced?services produced?

III.III. Scarcity and ChoiceScarcity and Choice A.A. Resources can only be used for one Resources can only be used for one

purpose at a timepurpose at a time B.B. Scarcity requires that choices be Scarcity requires that choices be

mademade C.C. The cost of any good, service, or The cost of any good, service, or

activity is the value of what must be activity is the value of what must be given up to obtain it (given up to obtain it (opportunity costopportunity cost))

1.1. Example: the opportunity cost Example: the opportunity cost of of good grades is the value good grades is the value which could which could have been received have been received by spending time by spending time with family and with family and friends.friends.

IV.IV. Resources (also known as factors of Resources (also known as factors of production, production, sometimes referred to as sometimes referred to as inputs)inputs)

A.A. landland 1.1. anything fixed – natural anything fixed – natural

resourcesresources a.a. forestsforests b.b. landland c.c. mineralsminerals d.d. oceansoceans e.e. wildlifewildlife f.f. oiloil

B.B. laborlabor 1.1. physical and mental physical and mental

talenttalent a.a. knowledge and knowledge and

skillsskills b.b. innovationinnovation c.c. ingenuityingenuity

C.C. CapitalCapital 1.1. something physical to aid something physical to aid

productionproduction a.a. toolstools b.b. equipmentequipment c.c. factoriesfactories d.d. transportationtransportation e.e. educated/trained educated/trained

labor labor forceforce

D.D. EntrepreneurshipEntrepreneurship 1.1. special kind of human resource special kind of human resource

that that provides four important provides four important functionsfunctions

a.a. combines resources needed combines resources needed for for productionproduction

b.b. makes basic business policy makes basic business policy decisionsdecisions

c.c. is an innovator for new , is an innovator for new , production techniques, production techniques, organizational formsorganizational forms

d.d. bears risk of time, effort, and bears risk of time, effort, and fundsfunds

V.V. Key assumption of Economic Key assumption of Economic thinkingthinking

A.A. the use of scarce resources to the use of scarce resources to produce a good is always produce a good is always

costlycostly 1.1. “no such thing as a free “no such thing as a free

lunch”lunch” a.a. costs may be hidden, costs may be hidden,

or non-monetary, or or non-monetary, or delayed but there is delayed but there is always a costalways a cost

2.2. opportunity costopportunity cost

B.B. Purposeful BehaviorPurposeful Behavior 1.1. rational self-interest entails rational self-interest entails

making decisions to achieve making decisions to achieve maximum maximum utilityutility

a.a. utility is the pleasure or utility is the pleasure or satisfaction obtained from satisfaction obtained from consuming a good or serviceconsuming a good or service

2.2. different preferences and different preferences and circumstances (including errors) circumstances (including errors)

lead lead to different choicesto different choices 3.3. rational self-interest is not the same rational self-interest is not the same

as as selfishnessselfishness

C.C. Marginal Analysis: benefits and Marginal Analysis: benefits and costscosts

1.1. most decisions concern a most decisions concern a change in the current condition change in the current condition (status quo)(status quo)

2.2. each option considered weighs each option considered weighs the marginal benefit against the marginal benefit against marginal costmarginal cost

3.3. the marginal cost of an action the marginal cost of an action should not outweigh the marginal should not outweigh the marginal benefitbenefit