Fundamental
Economic
Concepts
(1-A,F)
-Scarcity, Choice,
Opportunity Cost,
Marginal Analysis
I WON THE
LOTTERY!
I’ll give you anything you
want other than money.
What do you want?
Would your list ever end?
Why not?
2
What is Economics?
- The
study of mankind’s unlimited desires in
a world of limited resources.
-Economics is the science of scarcity
-Since we are unable to have everything we desire, we
must make CHOICES on how we will use our resources.
In economics we study the choices of individuals,
firms, and governments
Microeconomics deals with individual decisions,
Macroeconomics looks at the economy as a whole
How is Economics used?
• Economists use the scientific method to
make generalizations and abstractions to
develop theories. This is called theoretical
economics.
• These theories are then applied to fix
problems or meet economic goals. This is
called policy economics.
Positive vs. Normative
Positive Statements- Based on facts. Avoids
value judgements (what is).
Normative Statements- Includes value
judgements (what ought to be).
Copyright
ACDC Leadership 2015
4
5 Key Economic Assumptions
1. Society has unlimited wants and limited
resources (scarcity).
2. Due to scarcity, choices must be made. Every
choice has a cost (a trade-off).
3. Everyone’s goal is to make choices that
maximize their satisfaction. Everyone acts in their
own “self-interest.”
4. Everyone makes decisions by comparing the
marginal costs and marginal benefits of every
choice.
5. Real-life situations can be explained and
5
analyzed through simplified models and graphs.
Copyright
ACDC Leadership 2015
6
7
8
Copyright
ACDC Leadership 2015
9
Copyright
ACDC Leadership 2015
What is the Economy?
Why Do We Study It?
1. Description
2. Analysis
3. Explanation
4. Prediction
What? or How Much?
How? or Why?
When?
OR…
Why do we study Economics?
So
we
don’t
get
screwed.
Book Auction

What economic concepts were
demonstrated by the book auction?
◦
◦
◦
◦
◦
Scarcity
Value
Choices
Rationing
Equity vs. Efficiency
 Which was the sealed auction?
◦ Consumer surplus
Stay
Tuned!
Scarcity
Situation that occurs when wants are greater than
available resources.
Scarcity is the fundamental problem in economics.
In this classroom, is/are _________ scarce?
Wants are satisfied by available resources
Desks?
But not in the hallway…
 Water?
 Books?
No want for it in classroom, but outside… yes
 Gasoline?
Wants exceed available resources
 Jolly Ranchers?
…


Good looking economics instructors?
Good looking economics instructors?
We always assume….

People make decisions based upon
RATIONAL SELF-INTEREST
We must consider…
Examples: Shelter is a need, a mansion is a want.
Food is a need, a large pizza is a want.
Utility

The satisfaction that consumption of a
good or service provides
DIMINISHING MARGINAL UTILITY
As you consume additional units of a good, at some
point each additional unit will begin providing less
utility than the one before it.
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
• THERE IS NO SUCH THING AS A FREE LUNCH!!!
Seinfeld example
• Opportunity Cost: the next-best alternative
given up when making a choice
What is the opportunity cost of going to college?
Opportunity Cost
VS.
VS.
VS.
2008
Audit
Exam
Marginal Cost
Marginal = Additional, next
Additional cost vs. additional benefit
We constantly engage in
marginal analysis
Marginal Analysis
Marginal analysis (aka: thinking on the
margin) making decisions based on
increments
Example:
• When you decide to go to the mall you consider the
additional benefit and the additional cost (your
opportunity cost).
• Once you get to the mall, you continue to use
marginal analysis when you shop, buy food, and talk
to friends.
• Since your marginal benefits and costs can quickly
change your analyzing them every second.
• What if your ex-girlfriend shows up?
The Point: You will continue to do something as long as
the marginal benefit is greater than the marginal cost 29
Copyright
ACDC Leadership 2015
Thinking at the Margin
# Times
Watching Movie
Benefit
Cost
1st
2nd
3rd
Total
$30
$15
$5
$50
$10
$10
$10
$30
Would you see the movie three times?
Notice that the total benefit is more than
the total cost but you would NOT watch
the movie the 3rd time.
Copyright
ACDC Leadership 2015
30
Turn to a partner and share a
recent example of marginal thinking
in your life.
Economic
Terminology
Utility = Satisfaction!
Marginal = Additional!
Allocate = Distribute!
Copyright
ACDC Leadership 2015
33
Paradox of Value
Water vs. Diamonds
 Monetary Value

◦ Must be scarce
◦ Must give utility
Are diamonds scarce?
 Do they give utility?


Conspicuous consumption
◦ Examples?