Bell Ringer
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•
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One of the
most famous
quotes in
economics is
“there is no
such thing as
a free lunch.”
Do you agree
with
statement?
Why or why
not?
Limits, Alternatives, and
Choices
CHAPTER 1
The Economic Perspective
• Everything we come into contact with is scarce meaning there is
a finite amount of it
– It is often difficult for us to believe this because so many things are readily
available to us (particularly in the United States)
– Take water for example—is it possible to run out of it? Trees? Air?
– Let’s turn to something a bit more near to our hearts—money…can you
run out of money? What about the government?
– How about something intangible like time?
• In the long run, everything including money, air, and time is
finite or scarce. So what?
The Economic Perspective
• If all things are scarce then we have
choices to make about how we use
our time, money, and the trees.
• The choices that we have to make are
called opportunity costs—in other
words, what did we have to give up to
make the decision that we made?
– What is the political cartoon indicating?
• A personal example:
– The football game will cost you $5 to get
in or you could put $5 of gas in your tank.
What is your opportunity cost?
The Economic Perspective
• When discussing economics we are assuming certain things
1. We are dealing with “rational” people
2. People are self-interested/self-motivated
3. Self-interested and selfish are not the same thing—you raising prices to
make your company profitable does not mean you are only focused on
yourself. Remember that in most cases the person can refuse to
purchase the service/good or get it elsewhere.
The Economic Perspective
• Marginal in economics means extra, additional, or a change in.
– Thus, marginal cost is how much more will it cost you to do an extra year
of school, study another hour for an exam, or buy another pair of shoes
– Marginal benefit is how much more will you benefit from purchasing the
shoes, going to school, or studying
• Economists argue that you should never engage in an activity
where the marginal cost is higher than the marginal benefit.
– If buying another pair of shoes simply adds to your shoe collection but does
not have any real benefit, then you are better off using your money & time
in some other fashion
– On the other hand, if studying for that test an extra hour will produce a
higher grade on the test, it is likely the case that you should spend the
time to study again
Theories, Principles, and Models
• How do economists tests their ideas? The same way any other
scientist does—with the scientific method
–
–
–
–
Observe
Hypothesize
Looking at outcomes compared to hypotheses
Accept, reject, and modify hypothesis
• In order to create economic principles, statements that enables
predictions of probable effects of certain actions, we have to
make some assumptions
Theories, Principles, and Models
• Assumption 1: Generalizations
– When discussing these concepts we are looking at the average customer,
average worker, average businesses, or an average nation. There are
people who do not fit the model, but most people will. If you want to study
what happens in specific scenarios, you will need to take more advanced
courses in college 
• Assumption 2: Ceteris Paribus
– Ceteris Paribus means “other-things-equal.” In other words if we are
looking at the effect of price changes on Pepsi, we’re not concerned with
the other outside factors (unless the problem tells you to ).
Microeconomics and Macroeconomics
• Microeconomics: the part of economics that is concerned with
decisions made by individuals, workers, households, and
businesses
– They look at individual products or spending in a specific company
– They look at the sand, the shells, the water, and rocks—not the beach
• Macroeconomics: the part of economics that looks at the economy
as a whole
– Looking at the nation’s economy or how the nation functions within the
global economy
– They look at the aggregate (adding up all the smaller parts and looking at
it as a single unit)
– They evaluate the beach as a whole, not the rocks, shells, sand, etc.
Positive versus Normative Economics
• Positive economics focuses on cause and effect
• Normative economics focuses on judgments about what should
be done to change/stabilize/maintain the economy
• Which of these is positive, which is normative?
• The unemployment rate in France is higher than in the United
States
• The United States should tax wealthy people to help with the
deficit.
Scarcity
• Society has scarce, or limited, resources which fall in 4 categories
– Land: all natural resources
– Labor: any physical or mental ability used by humans to produce
something
– Capital: manufactured aids used to produce stuff (Factory, tractor, money,
tools, machinery)
– Entrepreneurial Ability: the person who takes the initiative and risk to be
creative and establish new business
Employment and Efficiency
• To use our scarce resources wisely we must achieve full
employment and full production
– Full employment means that no one able/willing to work should be without
a job and no equipment or land should unused
• This does take into consideration that land sometimes should lay fallow and
some people should not work
– Full production means that we are using full employment to get the most
satisfaction out of those resources
Employment and Efficiency
• In full production there are two types of efficiency:
– Productive efficiency—looks at producing any goods/services at the best
price
– Allocative efficiency—looks at producing the right mix of goods/services
that are wanted by society
Employment and Efficiency
• Because we have unlimited wants with limited resources, we have to make
choices
• Those choices are best explained with a Production Possibilities Model
• When using this model we assume:
–
–
–
–
We are at full employment productive efficiency
We have fixed resources (ex: the land could be used for a factory site or for farming)
Technology does not change during our analysis
We are only focusing on two goods (today’s example will be pizza and/or robots)
Employment and Efficiency
• We will start with creating a production possibilities table
– This is usually a standard XY table that gives the various options of using
your resources
– After creating this
table, you must put it
in graph form
Pizzas (In hundred
thousands)
Robots
(in thousands)
0
10
1
9
2
7
3
4
4
0
Employment and Efficiency
Robots (thousands)
Q
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Anything on this side of the PPC
(frontier) is unattainable
Any spot on the PPC is both
attainable and efficient
Anything in the
shaded area is
attainable, but
inefficient
1
2
3
4
5
6
Pizzas (hundred thousands)
7
8
Q
Employment and Efficiency
• By looking at this chart we can see that more pizzas mean fewer robots
and vice versa
– The opportunity cost of moving from A to B is 1000 robots
– If we move from B to C our marginal cost is 2000 robots
– Our total cost in that
same move is 3000 robots
Pizzas (In hundred
– When the marginal cost
thousands)
Increases each time you
0 (A)
move up it illustrates the
1 (B)
Law of Increasing
2 (C)
Opportunity Cost
3 (D)
4 (E)
Robots
(in thousands)
10
9
7
4
0
Employment and Efficiency
• Why do you have to sacrifice more robots in order to make
additional pizzas?
– Because as you use up the best resources to make pizzas you will have to
start using resources that would best be used to make robots
– EX: Kansas is great for wheat production and Silicon Valley is great for
producing technology
• As you use up the land in KA you will have to start taking away from the land
in CA which sacrifices additional units of robots
Unemployment, Growth, and the
Future
Robots (thousands)
Q
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Does “X” represent
unemployment or fullemployment?
Unemployment because we are
not using all our resources
efficiently
•X
1
2
3
4
5
6
Pizzas (hundred thousands)
7
8
Q
Unemployment, Growth, and the
Future
Robots (thousands)
Q
14
13
12
11
10
9
8
7
6
5
4
3
2
1
B’
Whenever new resources or technology become
available the PPC will shift to the right because the
producer can now make larger quantities of both
products
C’
D’
B
B moves to B’; C moves to C’, etc.
Such a shift of the PPC results in economic growth
(aka more total output)
C
D
No need to sacrifice one good for the other if new
resources can allow you to make more of both
1
2
3
4
5
6
Pizzas (hundred thousands)
7
8
Q
Unemployment, Growth, and the
Future
• Sometimes it is useful to purchase products that you could make
from other countries
– International specialization means spending domestic money on foreign
goods
– International trade is the exchange of goods/services on between nations
• We trade so we can get a better price and thus produce more of
something else with the money we saved