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Chapter 1

Paul Schneiderman, Ph.D., Professor of Finance & Economics, SouthernNew Hampshire University2008 South-Western

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Goods and Bads

ResourcesScarcity

Opportunity Costs

Costs and Benefits

In This Lecture

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In This Lecture..

Decisions Made at the

MarginEfficiencyUnintended Effects

Exchange

In This Lecture

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Building A Definition of Economics

~ Goods and Bads ~

Utility - The satisfaction one receives froma good

Bad - Anything from which individualsreceive disutility or dissatisfaction

Good - Anything from which individualsreceive utility or satisfaction

Disutility - The dissatisfaction one receivesfrom a bad

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Building A Definition of Economics

~ Resources ~

Land - All natural

resources, such asminerals, forests,water, and

unimproved land

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Building A Definition of Economics

~ Resources ~

Labor - The

physical and mentaltalents peoplecontribute to the

production process

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Building A Definition of Economics

~ Resources ~

Capital - Produced goodsthat can be used as inputs

for further production,such as factories,machinery, tools,

computers, and buildings

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Building A Definition of Economics

~ Resources ~

Entrepreneurship - Theparticular talent that somepeople have for:

organizing the resourcesof land, labor, and capitalto produce goods

seeking new businessopportunitiesdeveloping new ways of

doing things

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Scarcity

The condition inwhich our wants

are greater than thelimited resourcesavailable to satisfy

those wants

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Opportunity Costs

The most highly valued opportunityor alternative forfeited when a choice

is made

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Study or ???

Benefit

Cost

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Economics, the Science of Scarcity

The science of how individuals andsocieties deal with the fact that wants aregreater than the limited resources

available to satisfy those wants.

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Rationing Device

A means for

deciding who getswhat of availableresources and

goods

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Self Test Questions

1. Scarcity is the condition of finiteresources. True or false? Explain youranswer.

2. How does competition arise out ofscarcity?

3. How does choice arise out of scarcity?

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Marginal Benefits

Additional benefits. The benefits

connected to consuming an additional

unit of a good or undertaking onemore unit of an activity.

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Marginal Costs

Additional costs. The costs connected

to consuming an additional unit of a

good or undertaking one more unit ofan activity.

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Decisions at the Margin

Decision making characterized by

weighing the additional (marginal)

benefits of a change against theadditional (marginal) costs of a

change with respect to current

conditions

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Graphing WorkshopWorking with Graphs

Click graph to watch tutorial

http://www.swlearning.com/economics/graphingworkshop/archive_tutorials/generic2003/001_graphs.html

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Efficiency

Marginal Benefits = Marginal Costs

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Unintended Effects

A positive or negative outcome that wasnot anticipated

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Exchange/Trade

The process of giving

up one thing for

another.

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Self Test Questions

1. Give an example to illustrate how a change inopportunity cost can affect behavior.

2. There are both costs and benefits of studying. Ifyou continue to study (say, for a test) as long as

the marginal benefits of studying are greaterthan the marginal costs and stop studying whenthe two are equal, will your action be consistentwith having maximized the net benefits ofstudying? Explain your answer.

3. You stay up an added hour to study for a test.The intended effect is to raise your test grade.What might be an unintended effect of stayingup an added hour to study for the test?

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Positive vs. Normative Economics

Positive - The study of what is ineconomic matters.

Cause Effect

Normative - The study of what shouldbe in economic matters

Judgment andOpinion

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Microeconomics

Microeconomics deals with humanbehavior and choices as they relate torelatively small unitsan individual,

a business firm, an industry, a singlemarket.

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Microeconomic Questions~

How does a market work?

What level of output does a firm produce?

What price does a firm charge for thegood it produces?

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Microeconomic Questions(continued)

How does a consumer determine howmuch of a good he or she will buy?

Can government policy affect businessbehavior?

Can government policy affect consumer

behavior?

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Macroeconomics

Macroeconomics deals with humanbehavior and choices as they relate tohighly aggregate markets (e.g., the

goods and services market) or theentire economy.

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Macroeconomic Questions

How does the economy work?

Why is the unemployment rate

sometimes high and sometimes low?What causes inflation?

Why do some national economies

grow faster than other nationaleconomies?

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Macroeconomic Questions(continued)

What might cause interest rates to below one year and high the next?

How do changes in the moneysupply affect the economy?

How do changes in government

spending and taxes affect theeconomy?

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Wall Street Journal

The Wall Street Journal is a is a rich sourceof information which provides real lifeexamples of micro- and macro economic

activities. Check todays issue to see themost current news.

http://www.wsj.com

http://www.wsj.com/http://www.wsj.com/

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Other Useful Sources of CurrentEconomic News

New York Timeshttp://www.nytimes.com/pages/business/index.html

Financial Timeshttp://www.ft.com/home/us

The Economisthttp://www.economist.com/index.html

http://www.nytimes.com/pages/business/index.htmlhttp://www.ft.com/home/ushttp://www.economist.com/index.htmlhttp://www.economist.com/index.htmlhttp://www.ft.com/home/ushttp://www.nytimes.com/pages/business/index.html

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