What IS Economics?

Economics is the
study of how people
seek to satisfy their
needs and wants by
making choices.
What is a need?

A need is something
necessary for
survival. Examples:
What is a want?

A want is an item
we desire but is not
essential to survival.
Examples:
What do we mean by opportunity
cost?
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When we decide to do
something, one of the
things we could have
done is usually better
than the others. This is
the most likely option.
This second best thing
is called the opportunity
cost.
Opportunity cost

In other words, you
could have slept in
instead of coming to
school today. You chose
to come to school. The
opportunity cost was
sleeping in.
So if
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economics is the
study of how people
seek to satisfy their
needs and wants by
making choices,
why do people need
to make choices at
all?
Scarcity
Scarcity


Limited quantities of
resources to meet
unlimited wants.
A limit is ALWAYS
reached.

Scarcity always
exists because
our needs and
wants are
always greater
than our
resources.
Scarcity is not the same as
shortage.

A shortage is when producers cannot or will
not offer goods or services at current prices

May be long term or short term, but will or can
end
Two important terms

Goods


Physical objects that
are sold
Services

Actions or activities
that one person
performs for another
and is paid for
Resources –those things used
to create goods and services

They are also called
Factors of
Production


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Land
Labor
Capital


Physical
Human
Land

All natural resources
used to produce
goods and services

Includes the fertile
land itself and
anything that comes
from the land
including such things
as forests, minerals,
and water
Labor



The effort a person
devotes to a task for
which he or she is
paid
This person works
for someone else –
a company
Includes the people
who are working or
looking for work
Entrepreneur

Person who puts
land, labor, and
capital together,
the factors of
production, to
create new goods
and services
Physical Capital


Also called capital
goods - Inventory
Buildings,
equipment, and
supplies needed to
run a business
Physical capital can make us
more productive

Example: Washing dishes for
your family: man vs machine


By hand: 21 meals per week, 2
people working, 30 minutes
per meal is 21 hours per week
of work
A dishwasher costs $400 but
now dishes take only 15
minutes per meal for one
person, a savings of 15 ½
hours per week
Extra time
15 ½ hours per week for
other activities
More knowledge
By learning to use a
dishwasher family members
become more able to use
other appliances
More productivity
With extra time and
knowledge they can do extra
chores or activities that will
help the family
Human capital

The knowledge and
skills a worker gains
through education
and experience


Cost
What it takes to get or do
something (what you give
up)
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Benefit
What is gained
when a choice is
made
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Incentives
Things that get
people to do things

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Can be monetary
incentives
Or non-monetary
incentives

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Consequence
What happens when
you make a choice
Trade-offs


Trade-offs are all the
alternatives we give up
whenever we choose
one course of action
over another.
Every decision we make
involves trade-offs.
Trade-offs


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Individuals make tradeoffs but businesses also
do.
Decisions made about
land, labor, and capital
involve trade-offs.
For example, if a farmer
plants broccoli, he
cannot plant corn.
Society and trade-offs



Countries also make
decisions that involve
trade-offs.
This is called guns or
butter.
This means that
materials used for
military purposes are
not available for
domestic purposes.
Opportunity cost


Remember: When you
make a decision, you
give up something –
this is the opportunity
cost.
Or as an economist
might say, “Choosing is
refusing.”
Opportunity cost

Some decisions are
easy but sometimes
choosing between
alternatives can be
hard.
Margins
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But is a decision always
just all or nothing?
Instead of sleeping all
day and not coming to
school at all, what if
you wanted to sleep
five more minutes?
What about an extra
half hour?
This is called the
margin.
Decision making at the margin
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Comparing the
opportunity cost and
the benefits at the
margin helps make
good decisions.
At what point do the
costs outweigh the
benefits?
The margin is where
you consider the cost of
Thinking at the margin-using a grid
can help make the best choice
Options
Benefit
Opportunity
Cost
1st hour of extra Grade of C on
study time
test
One hour of
sleep
2nd hour of
Grade of B on
extra study time test
Two hours of
sleep
3rd hour of extra Grade of B+ on
study time
test
Three hours of
sleep
You could make an opportunity
grid.
Alternative
1
Benefits
Decision
Opportunit
y cost
Benefits
given up
(cost)
Alternative
2
Alternative
3
Thinking at the margin



Deciding by thinking at
the margin is like any
other decision
What will you sacrifice?
What will you gain?
When the opportunity
cost outweighs the
gain, it’s time to stop.
One more thing….
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TANSTAAFL
There ain’t no such
thing as a free lunch!
Every choice has an
opportunity cost!