Basic Economic Concepts Unit Slides, Study notes of Economics

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Unit I: Basic

Economic Concepts

What is Economics in General?

Economics is the study of _________.

Economics is the science of scarcity.

Scarcity is the condition in which our wantsare greater than our limited resources.

Since we are unable to have everything wedesire, we must make choices on how we willuse our resources.

In economics we will study the choices ofindividuals, firms, and governments.

choices

Micro vs. Macro

MICROeconomics-

Study of small economic units such asindividuals, firms, and industries (competitivemarkets, labor markets, personal decisionmaking, etc.)

MACROeconomics-

Study of the large economy as a whole or inits basic subdivisions (National EconomicGrowth, Government Spending, Inflation,Unemployment, etc.)

Positive vs. Normative

Positive Statements- Based on facts. Avoids valuejudgements (what is). Normative Statements- Includes value judgements(what ought to be).

How is Economics used?

Economists use the scientific method to make

generalizations and abstractions to developtheories. This is called theoretical economics. •

These theories are then applied to fix problems or meet economic goals. This is called policyeconomics.

Marginal Analysis

In economics the term marginal = additional

“Thinking on the margin”, or MARGINAL ANALYSISinvolves making decisions based on the additionalbenefit vs. the additional cost. For Example: You have been shopping at the mall for a half hour, theadditional benefit of shopping for an additional half-hourmight outweigh the additional cost (the opportunity cost). After three hours, the additional benefit from staying anadditional half-hour would likely be less than the additionalcost.

5 Key Economic Assumptions

Society’s wants are unlimited, but ALL resourcesare limited (scarcity).

Due to scarcity, choices must be made. Every choicehas a cost (a trade-off).

Everyone’s goal is to make choices that maximizetheir satisfaction. Everyone acts in their own “self-interest.”

Everyone acts rationally by comparing the marginalcosts and marginal benefits of every choice

Real-life situations can be explained and analyzedthrough simplified models and graphs.

Trade-offs

ALL decisions involve trade-offs.

Trade-offs are all the alternatives that we give upwhenever we choose one course of action over others. The most desirable alternative given up as a result of adecision is known as opportunity cost.

(Examples: going to the movies)

What are trade-offs of deciding to go to college? What is the opportunity cost of going to college?

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The Factors of Production

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What is the Production Possibilities Curve?

A production possibilities graph (PPG) is amodel that shows alternative ways that aneconomy can use its scarce resources

This model graphically demonstrates scarcity,trade-offs, opportunity costs, and efficiency.

4 Key Assumptions

Only two goods can be produced

Full employment of resources

Fixed Resources (

Ceteris Paribus

Fixed Technology

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a

b

c

d

e

f

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12

9

5

0

0

0

2

4

6

8

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Bikes

Computers^ NOW GRAPH IT: Put bikes on y-axis and

computers on x-axis

Production “Possibilities” Table

Each point represents a specificcombination of goods that can be

produced given full employment of

resources.

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2 Bikes

2.The opportunity cost ofmoving from b to d is… 3.The opportunity cost ofmoving from d to b is… 4.The opportunity cost ofmoving from f to c is…

7 Bikes 4 Computer 0 Computers

5.What can you say about point G?

Unattainable

1. The opportunity cost ofmoving from a to b is… Example:

Opportunity Cost

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The Production Possibilities

Curve (or Frontier)

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PIZZA

ROBOTS

List the Opportunity Cost of moving from a-b,b-c, c-d, and d-e.

Law of Increasing Opportunity Cost- •

As you produce more of any good, theopportunity cost (forgone production ofanother good) will increase.

Why? Resources are NOT easily adaptableto producing both goods.

Result is a bowed out

(Concave) PPC

A

B

C

D

E

PRODUCTION POSSIBILITIES

1 Bike

2.The PER UNIT opportunitycost of moving from b to c is…^ 3.The PER UNIT opportunitycost of moving from c to d is…^ 4.The PER UNIT opportunitycost of moving from d to e is…

1.5 (3/2) Bikes

2 Bikes

2.5 (5/2) Bikes

= Opportunity Cost

Units Gained

1. The PER UNIT opportunity costof moving from a to b is… Example:

PER UNIT Opportunity Cost

How much each marginal

unit costs

NOTICE: Increasing Opportunity Costs

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