The Economic Way of Thinking
Dr. T. D. Mitchell
Bonneville High School,
Idaho Falls, Idaho
Scarcity: The Basic Economic Problem
• Principle 1 People Have Wants
• Principle 2 Scarcity Affects Everyone
• Goods
• Services
• Consumer
• Producer
Economics: Concepts and Choices, 2011. Holt McDougal
Scarcity: The Basic Economic Problem
• Scarcity Leads to Three Economic Questions
• What will be produced?
• How will it be produced?
• For whom it will be produced?
Economics: Concepts and Choices, 2011. Holt McDougal
The Factors of Production
Land
Labor
Capital
Entrepreneurship
Economics: Concepts and Choices, 2011. Holt McDougal
Economic Choices: Opportunity Cost
• Making Choices
• Incentives
• Utility
• Economize
• Factors that help you make an economic
choice:
1. Motivations for choice
2. No Free Lunch
Economics: Concepts and Choices, 2011. Holt McDougal
Trade-Offs and Opportunity Cost
• Making Trade-Offs
• Counting the Opportunity Costs
• Analyzing Choices
• Marginal Cost
• Marginal Benefits
Economics: Concepts and Choices, 2011. Holt McDougal
Analyzing Production Possibilities
• Economic Models
• Production Possibilities Curve (Frontier)
• Assumption
• Resources are fixed
• All resources are fully employed
• Technology is fixed
Economics: Concepts and Choices, 2011. Holt McDougal
Review: Production Possibilities Curve
Economics: Concepts and Choices, 2011. Holt McDougal
What We Learn from PPCs
• Efficiency
• Underutilization
• Law of increasing opportunities costs
• Guns and Butter
Economics: Concepts and Choices, 2011. Holt McDougal
Changing Production Possibilities
Production Possibilities Curve
7
6
Refrigerators
5
4
3
2
1
0
0
2
4
6
8
10
Cars
Economics: Concepts and Choices, 2011. Holt McDougal
12
14
More on the PPC
Economics: Concepts and Choices, 2011. Holt McDougal
Economists Toolbox
• Statistics
• Using economic models
• Charts and tables
Chart Title
6
4
2
0
Category 1
Category 2
Series 1
Category 3
Series 2
Category 4
Series 3
• Using Graphs
6
4
2
Series 1
0
Category 1
Series 2
Category 2
Series 3
Category 3
Category 4
Economics: Concepts and Choices, 2011. Holt McDougal
Economists Study
Macroeconomics
The study of the whole economy
Microeconomics
The study of the individual
consumer
Units of Study
Units of Study
 Economic Growth
 Economic Stability
 International Trade
Topics of interest
 Money, Banking, finance
 Government Taxing and
Spending Policies
 Employment and
unemployment
 Inflation
 Consumer Markets
 Business Markets
 Labor Markets
Topics of Interest
 Markets, prices, costs, profits,
Competition, Government
Regulations
 Consumer Behavior
 Business Behavior
Economics: Concepts and Choices, 2011. Holt McDougal
Positive and Normative Economics
Positive Economics
• A way of describing and
explaining economics as it is,
not as it should be.
• Involves verifiable facts, not
value judgments.
Normative Economics
• A way of describing and
explaining what economic
behavior ought to be, not
what it actually is.
• Does not involve value
judgments because it seeks
to make recommendations
for action.
Economics: Concepts and Choices, 2011. Holt McDougal
Adam Smith:
Founder of Modern Economics
 250 Years ago, economics
did not exist as an academic
discipline.
 In 1776, Adam Smith
changed all this.
 Born in Scotland, studied
literature, logic, and moral
philosophy.
 Wrote Wealth of Nations in
1776.
‐
‐
‐
Economic self-interest
The invisible hand
Became the foundation of
modern economics
Economics: Concepts and Choices, 2011. Holt McDougal