- The study of mankind’s unlimited desires in a world of limited resources.
-Economics is a social science , dealing with how people react to changing variables.
-Economists form theories , based on economic models in which they manipulate variables .
-These theories, models and variables are used to describe what is (Positive Economics) and what ought to be (Normative Economics).

What is the Economy?

1. Description
2. Analysis
3. Explanation
4. Prediction
What? or How Much?
How? or Why?
When?

Why do we study Economics?

Scarcity
Situation that occurs when wants are greater than available resources.

In this classroom, is/are _________ scarce?



Desks?
Water?
Books?
Wants are satisfied by available resources
But not in the hallway…


…
Gasoline?
Jolly Ranchers?
No want for it in classroom, but outside… yes
Wants exceed available resources

Good looking economics instructors?

Good looking economics instructors?

Examples: Shelter is a need, a mansion is a want.
Food is a need, a large pizza is a want.

Scarcity forces us to ask the following questions…

WHAT to produce?

HOW to produce?

FOR WHOM to produce?

Imagine a scenario where…
…we take an all-expensespaid class trip to…

Our plane is forced to make a “water landing,” and we are able to swim to an uncharted island.
What will we need to do? What questions will we have to answer?

FACTORS OF PRODUCTION




Land – all gifts of nature
Labor – human efforts and abilities
Capital – tools, equipment, space
Entrepreneurship – risk taking, ideas
◦ **The “spark” or driving force of the economy**

EXAMPLES:

Adam Smith


“Wealth of Nations”
◦ 1776
Invisible hand
◦ Meat
◦ Bread
◦ Candles
◦ How do we decide to provide these?

Utility

The satisfaction that consumption of a good or service provides

DIMINISHING MARGINAL UTILITY

Paradox of Value




Water vs. Diamonds
Monetary Value
◦ Must be scarce
◦ Must give utility
Are diamonds scarce?
Do they give utility?

Conspicuous consumption

Cost – Benefit Analysis

Cost – Benefit Analysis

Cost – Benefit Analysis
• We all make decisions in our own self-interest
• All decisions come with certain trade-offs and alternatives
• Opportunity Cost: the next-best alternative given up when making a choice

Opportunity Cost
VS.
VS.
VS.

Marginal Cost
Marginal = Additional, next
Additional cost vs. additional benefit
We constantly engage in marginal analysis

Production Possibilities Frontier
All possible combinations of two products that can be produced when employing 100% of available resources.
Guns (thousands) Butter (tons)
80
75
60
0
150
300
30
0
400
450

Production Possibilities Frontier

CIRCULAR FLOW