The Economic Way of
Thinking
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What is Economics about?
A. how people make choices
B. First principle of Economics
1.
people have unlimited wants
and desires
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C.
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D.
Second principle of Economics
1.
people live in a world of
limited resources
Third principle of Economics
1.
given the above, people have
to make choices
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II. The Economic Problem (question to be
answered)
A. What goods and services should
be produce?
B. How should goods and services
be produced?
C. Who should get the goods and
services produced?
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III. Scarcity and Choice
A.
Resources can only be used for one
purpose at a time
B.
Scarcity requires that choices be made
C.
The cost of any good, service, or
activity is the value of what must be
given up to obtain it (opportunity cost)
1.
Example: the opportunity cost of
good grades is the value which could
have been received by spending time
with family and friends.
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IV. Resources (also known as factors of production,
sometimes referred to as inputs)
A.
land
1.
anything fixed – natural resources
a.
forests
b.
land
c.
minerals
d.
oceans
e.
wildlife
f.
oil
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B.
labor
1.
physical and mental talent
a.
knowledge and skills
b.
innovation
c.
ingenuity
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C.
Capital
1.
something physical to aid
production
a.
tools
b.
equipment
c.
factories
d.
transportation
e.
educated/trained labor
force
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D.
Entrepreneurship
1.
special kind of human resource that
provides four important functions
a.
combines resources needed for
production
b.
makes basic business policy
decisions
c.
is an innovator for new ,
production techniques,
organizational forms
d.
bears risk of time, effort, and
funds
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V.
Key assumption of Economic thinking
A.
the use of scarce resources to
produce a good is always costly
1.
“no such thing as a free
lunch”
a.
costs may be hidden,
or non-monetary, or
delayed but there is
always a cost
2.
opportunity cost
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B.
Purposeful Behavior
1.
rational self-interest entails
making decisions to achieve maximum
utility
a.
utility is the pleasure or
satisfaction obtained from
consuming a good or service
2.
different preferences and
circumstances (including errors) lead
to different choices
3.
rational self-interest is not the same as
selfishness
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C.
Marginal Analysis: benefits and
costs
1.
most decisions concern a
change in the current condition
(status quo)
2.
each option considered weighs
the marginal benefit against
marginal cost
3.
the marginal cost of an action
should not outweigh the marginal
benefit