Unit 1: Basic Economic
Concepts
I (Mr. H) WON THE
LOTTERY!
I’ll give you anything you want other than money.
What do you want?
Would your list ever end?
Why not?
Scarcity!!!
What is Economics?
• Economics is the science of scarcity.
• Scarcity means that we have unlimited wants
but limited resources.
• Since we are unable to have everything we
desire, we must make choices on how we will
use our resources.
Economics is the study of _________.
choices
In economics we will study the choices of
individuals, firms, and governments.
Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on
welfare versus military.
Textbook Definition
Economics- Social science concerned with the
efficient use of scarce resources to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
scarcity
Scarcity
Analyzing Choices
Characteristics of Cost
• Costs are to people. All costs are costs to the
decision-maker.
• Costs are subjective; individuals value costs
differently.
• Opportunity costs may change and changes in costs
affect people’s choices.
• Only actions have costs. “Things” have no costs
independent of decisions about their use.
• All costs lie in the future. The anticipation of future
consequences shapes people’s decisions.
Trade-offs and Opportunity Cost
ALL decisions involve trade-offs.
Trade-offs are all the alternatives that we give up
whenever we choose one course of action over
others.(Examples: going to the movies)
The most desirable alternative given up as a
result of a decision is known as opportunity cost.
What are trade-offs of deciding to go to college?
What is the opportunity cost of going to college?
GEICO assumes you understand
http://www.youtube.com/watch?v=91LQWQEyD8w&feature=related
opportunity cost. Why?
Given the following assumptions, make a rational
choice in your own self-interest (hold everything
else constant)…
1. You want to visit your friend for a week
2. You work every weekday earning $100 per day
3. You have three flights to choose from:
Thursday Night Flight = $275
Friday Early Morning Flight = $300
Friday Night Flight = $325
Which flight should you choose? Why?
Paul Solman: The Butcher, the
Baker, and the Brewer
What is meant by rational maximizing?
Review with your neighbor…
1. Define scarcity
2. Define Economics
3. Identify the relationship between scarcity
and choices
4. Define opportunity cost
5. Give an example of an opportunity cost you
faced after you left school yesterday.
Paul Solman Video:
Opportunity Lost
Micro vs. Macro
MICROeconomicsStudy of small economic units such as
individuals, firms, and industries (ex: supply
and demand in specific markets, production
costs, labor markets, etc.)
MACROeconomicsStudy of the large economy as a whole or
economic aggregates (ex: economic growth,
government spending, inflation,
unemployment, international trade etc.)
Micro vs. Macro
MICROeconomicsStudy of small economic units such as
individuals, firms, and industries (ex: supply
and demand in specific markets, production
costs, labor markets, etc.)
MACROeconomicsStudy of the large economy as a whole or
economic aggregates (ex: economic growth,
government spending, inflation,
unemployment, international trade etc.)
5 Key Economic Assumptions
1. Society’s wants are unlimited, but ALL resources
are limited (scarcity).
2. Due to scarcity, choices must be made. Every choice
has a cost (a trade-off).
3. Everyone’s goal is to make choices that maximize
their satisfaction. Everyone acts in their own “selfinterest.”
4. Everyone makes decisions by comparing the
marginal costs and marginal benefits of every
choice.
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
Thinking at the Margin
# Times
Watching Movie
Benefit
Cost
1st
2nd
3rd
Total
$30
$15
$5
$50
$10
$10
$10
$30
Would you see the movie three times?
Notice that the total benefit is more than the
total cost but you would NOT watch the movie
the 3rd time.
Marginal Analysis
In economics the term marginal = additional
“Thinking on the margin”, or MARGINAL
ANALYSIS involves making decisions based on
the additional benefit vs. the additional cost.
For Example:
You have been shopping at the mall for a half hour, the
additional benefit of shopping for an additional half-hour
might outweigh the additional cost (the opportunity cost).
After three hours, the additional benefit from staying an
additional half-hour would likely be less than the
additional cost.
Marginal Analysis
Notice that the decision making process wasn’t
“should I go to the mall for 3 hours or should I
stay home”
In reality the decision making process started
with “should I go to the mall at all.”
Once you are there you thought “should I stay
for an additional half hour or should I go.”
The MARGINAL ANALYSIS approach to
decision making is more commonly used than the
“all or nothing” approach.
Marginal Analysis
Notice that the decision making process wasn’t
“should I go to the mall for 3 hours or should I
stay home” You will continue to do
something until the
In reality the decision
making
process started
marginal
cost
with “shouldoutweighs
I go to the the
mallmarginal
at all.”
Once you are there you
thought “should I stay
benefit.
for an additional half hour or should I go.”
The MARGINAL ANALYSIS approach to
decision making is more comely used than the “all
or nothing” approach.