Introduction to
Economics:
Social Issues
and Economic
Thinking
Wendy A . Stock
CHAPTER 1
AN INTRODUCTION TO THE
ECONOMIC WAY OF THINKING
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AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
Define economics
Explain how scarce
resources influence
choices
Describe the
influence of benefits
and costs on
deciding among
alternatives
Identify the decision
rules individuals and
firms use to make
choices
Copyright © 2013 John Wiley & Sons, Inc.
Explain why
decisions are made
“at the margin”
Assess the general
conditions that
generate maximum
utility or profits
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DEFINITION OF ECONOMICS
Economics is the study of choices.
 Economics is a tool or way of looking at the
world
 Economics help us to understand all kinds
of choices
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3
MICROECONOMICS AND MACROECONOMICS
Macroeconomics deals with choices that
societies make.
Microeconomics deals with the choices
individuals, households, and businesses
make.
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WHY STUDY ECONOMICS?
 Improve decision-making skills
 Improve critical thinking skills
 Develop analytical and quantitative skills
 Understand many current issues
 Approach controversial issues with
objectivity and clarity
 Prepare for graduate school in many fields
 Better job opportunities
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5
SCARCIT Y
 Scarcity occurs when we have fewer
resources than we have uses for those
resources.
 Scarcity implies choices
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THREE BASIC ECONOMIC RESOURCES
 Labor – laborers combine time and energy
to produce goods or services
 Land – including natural resources, water,
and clean air
 Capital - long-lasting tools or skills used in
producing goods and services
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HOW CHOICES ARE MADE?
Decision makers make choices by comparing
benefits and costs.
 Benefit of a choice is what you gain when
you make the choice.
 Cost of a choice is what you give up to
make the choice.
Utility - the satisfaction or happiness
individuals get from their choices.
Profit - the difference between the earnings
and the costs of production.
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8
OPPORTUNIT Y COST
The opportunity cost of a choice is the value
of the next-best alternative foregone.
Opportunity cost is a valuation of the nextbest alternative opportunity not chosen.
What’s the opportunity cost of going to
college?
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9
OPPORTUNIT Y COST OF COLLEGE
Private
Tuition &
fees
Books and Supplies
Estimated wages with HS Diploma
Annual Total
Four Years Total
Public
$27,000
$1,000
$28,000
$56,000
$224,000
$7,600
$1,000
$28,000
$36,600
$146,400
$350.00
$228.75
Class days:
32 weeks x 5 = 160 days/yr. x 4 = 640 days
Cost of Missing One Day Class:
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10
ECONOMIC WAY OF THINKING
“Incentives Matter”
When people respond to incentives and consider
costs and benefits of their possible choices in
order to maximize their utility or profit, they
engage in the economic way of thinking.
 As the benefits of making a particular choice
increase, you are more likely to make the
choice.
As the costs of making the choice increase, you
are less likely to make the choice.
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11
CETERIS PARIBUS ASSUMPTION
Ceteris paribus means “all other things
remaining constant or all else equal.”
e.g. If the correct amount of fertilizer is
added to a crop and at the same time there
is a heat wave and drought, the crop yield
may actually fall. Thinking the fertilizer is
not effective is a violation of ceteris
paribus assumption.
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12
DECISIONS ARE MADE “AT THE MARGIN”
The marginal cost of a choice is the additional
or incremental cost associated with the choice.
The marginal benefit of a choice is the
additional or incremental benefit associated
with the choice.
?
Marginal Benefits
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≷
Marginal Costs
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LAW OF DIMINISHING MARGINAL BENEFITS
The Law of Diminishing Marginal Benefits:
Ceteris paribus, as more and more of an activity
is done, the marginal benefits derived from the
activity tend to diminish.
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14
LAW OF DIMINISHING MARGINAL BENEFITS
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15
LAW OF INCREASING MARGINAL COSTS
The Law of Increasing Marginal Costs: Ceteris
paribus, as more and more of an activity is
done, the marginal costs of the activity tend to
increase.
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LAW OF INCREASING MARGINAL COSTS
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17
MARGINAL DECISION RULE
The Marginal Decision Rule states that you can
maximize the net benefit you receive from an
activity when you engage in that activity until
the marginal benefits are equal to the marginal
costs.
MB = MC
The Net benefit of an activity is equal to its total
benefit minus its total cost.
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MARGINAL DECISION RULE
The Marginal Decision Rule: MB = MC
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19
SUNK COST
A Sunk Cost is a cost that, once incurred,
cannot be recovered.
Sunk costs are irrelevant when making
decisions at the margin.
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20
QUESTIONS/DISCUSSIONS
Discuss the costs and benefits of each of
the following activities; include at least
one nonmonetary cost and benefit in your
discussion of each:
a. Studying for an exam
b. Going skiing on a class day
c. Taking a job
d. Watching television
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KEY CONCEPTS
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Economics
Macroeconomics
Microeconomics
Basic economic
resources
Scarcity
Cost
Benefit
Utility
Profit
Copyright © 2013 John Wiley & Sons, Inc.
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Opportunity cost
Ceteris paribus
Marginal cost
Marginal benefit
Law of diminishing
marginal benefits
Law of increasing
marginal cost
Net benefit
Marginal decision rule
Sunk cost
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