Scarcity and Choice

Homework – Day 1
• Read all of Chapter 1. As you read, answer the following
• 1. Define economics.
• 2. Explain the “economic way of thinking,” including
definitions of scarcity, opportunity cost, rational self-interest,
utility, marginal benefits, marginal costs, marginal analysis,
and the ways these concepts are used to understand decisionmaking.
• 3. Describe how economists use the scientific method to
create models of complex economic behaviors.
• 4. Explain the ceteris paribus assumption and its importance
in economics.
• 5. List 8 widely accepted economic goals in the United States.
• 6. Explain the difference between microeconomics and
• 7. Explain the difference between positive economics and
normative economics.
What is economics?
• The study of how we use resources to achieve
the maximum satisfaction of economic wants.
• So what’s the problem?
• Resources are scarce.
• Economic wants are unlimited – we can’t have
it all.
Scarcity and Choice
• Because resources are limited and have
alternate uses, economists say that they are
scarce, that is, we must make choices on how
to use them.
• Choosing to use them for one thing means we
cannot use them for another.
• Are there any resources that are not scarce?
Scarcity and Choice
• The cost of making theses choices (sacrificing
the alternative use of the resources) is known
as the opportunity cost of making that choice.
It is the cost of the next best thing that you
could have done with the same resources.
• Opportunity costs include the actual monetary
cost of a choice, but they also include time
and forgone opportunities.
Scarcity and Choice
• Questions?
• What is your opportunity cost for taking this
• What is the opportunity cost of going to
• What if you were Lebron
Rational Behavior
• Individuals seek to maximize their utility
(satisfaction, well-being, etc.)
• In doing so they behave rationally rather
than randomly.
• Does this mean that we are all selfish?
– No!
–Why not?
• Economists focus on activity on the
• Marginal analysis is the comparison of
marginal benefits and marginal costs.
• Marginal benefits and costs: the benefit
(utility gained) or cost of consuming or
producing one more of something.
• Marginal benefit always involves the
marginal cost of forgoing something
• We consume or produce too much of
something when its marginal cost is
greater than its marginal benefit.
Economic Methodology
• Economics relies on the scientific method.
– Observation of facts
– Formulation of hypotheses
– Testing hypotheses
– Hypothesis >>> theory >>> law (or principle).
– Theories and laws are then combined to create
– Models are intentionally simplified explanations of
how the real world works that makes it easier for
us to understand.
Usually, when it seems like there’s
something wrong with the theory (or
the model), it’s because we don’t
understand the theory fully, or we are
lacking some information about it. Very
occasionally, you have stumbled on an
unresolved question in the theory. Once
in a generation, it’s because the theory
is incorrect. (These are your Einsteins.)
Ceteris Paribus
• “All other things unchanged.”
• Key assumption in economics.
• For example, the law of demand states
that, as the price for a product goes up,
the quantity of it that people will buy
will go down.
• “All other things unchanged” is
• Economic theories and principles enable us to
predict the probable effects of certain actions
or events.
• Generalizations mean that these principles
hold true when applied to a large group of
consumers or producers, even if they are not
true for every individual.
• It turns out the same thing is true in quantum
Macroeconomics vs. Microeconomics
• Macroeconomics examines the economy
as a whole or large sectors of it:
–Total output
–Total employment
–The general level of prices
Macroeconomics vs. Microeconomics
• Microeconomics examines specific
economic units or small parts of the
Positive vs. Normative Economics
• Positive: Statements about the way
things are.
• Normative: Statements about the
way things should be.
• Answer Chapter 1 Study Questions
#1, 2, 4, 10, & 11.
• Read the Chapter 1 Appendix and
answer Appendix Study Questions
#2, 3, 4, 7, & 8.