Scarcity

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Fundamental

Economic

Concepts

What is Economics?

- The study of mankind’s unlimited desires in a world of limited resources.

-Economics is a

social science

, dealing with how people react to changing variables.

-Economists form

theories

, based on economic

models

in which they manipulate

variables

.

-These theories, models and variables are used to describe what is

(Positive Economics)

and what ought to be

(Normative Economics).

What is the Economy?

Why Do We Study It?

1. Description

2. Analysis

3. Explanation

4. Prediction

What? or How Much?

How? or Why?

OR…

When?

Why do we study Economics?

So we don’t get screwed.

Scarcity

Situation that occurs when wants are greater than available resources.

In this classroom, is/are _________ scarce?

Desks?

Water?

Books?

Wants are satisfied by available resources

But not in the hallway…

Gasoline?

Jolly Ranchers?

No want for it in classroom, but outside… yes

Wants exceed available resources

Good looking economics instructors?

Good looking economics instructors?

We must consider…

Examples: Shelter is a need, a mansion is a want.

Food is a need, a large pizza is a want.

Scarcity forces us to ask the following questions…

WHAT to produce?

HOW to produce?

FOR WHOM to produce?

Imagine a scenario where…

…we take an all-expensespaid class trip to…

Australia!

Our plane is forced to make a “water landing,” and we are able to swim to an uncharted island.

What will we need to do? What questions will we have to answer?

FACTORS OF PRODUCTION

Land – all gifts of nature

Labor – human efforts and abilities

Capital – tools, equipment, space

Entrepreneurship – risk taking, ideas

**The “spark” or driving force of the economy**

EXAMPLES:

Adam Smith

“Wealth of Nations”

1776

Invisible hand

Meat

Bread

Candles

How do we decide to provide these?

Utility

The satisfaction that consumption of a good or service provides

DIMINISHING MARGINAL UTILITY

Paradox of Value

Water vs. Diamonds

Monetary Value

Must be scarce

Must give utility

Are diamonds scarce?

Do they give utility?

Conspicuous consumption

Cost – Benefit Analysis

Question? :

What do you want

RIGHT NOW?

Cost – Benefit Analysis

Follow up question? :

Why don’t you go get it?

Cost – Benefit Analysis

• We all make decisions in our own self-interest

• All decisions come with certain trade-offs and alternatives

Opportunity Cost: the next-best alternative given up when making a choice

Opportunity Cost

VS.

VS.

VS.

Marginal Cost

Marginal = Additional, next

Additional cost vs. additional benefit

We constantly engage in

marginal analysis

Production Possibilities Frontier

All possible combinations of two products that can be produced when employing 100% of available resources.

Guns (thousands) Butter (tons)

80

75

60

0

150

300

30

0

400

450

Production Possibilities Frontier

CIRCULAR FLOW

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