Introduction to Economics“The Basic Concepts of Economics”

Introduction

• Microeconomics = The study of how individuals make decisions and how these decisions interact.

• Macroeconomics = The study of the overall economy and its’ ups and downs.

• Market vs. Command Economy

• Invisible Hand vs. Government

Natural Resources

• They were here long before man/woman ever set foot on earth

• Natural Resources A Gift of Nature

• Humans learned how to extract resources from the land and transform them from their original state

Trees = Paper

Sand = Glass

Sun = Energy

We Live in a Finite World

• No matter how much we conserve, if we keep consuming natural resources at our current rate, they will run out.

A Consumer Society!

• The world’s people have consumed as many goods and services since 1950 as all previous generations put together

• If everyone on our planet consumed resources at the rate of U.S. citizens, we would need 3 more planet earth’s to provide for all 6 billion people.

Renewable vs. Nonrenewable Resources

• Conservation can the supply of renewable resources

• Mining one ton of a nonrenewable resource depletes that resource by one ton

• Before society has depleted a certain resource we may have abandoned using it.

• Examples = Coal and Flint

Economics is the Study of ChoicesEconomics is the Study of Choices

• Productive Resources:Productive Resources: Anything that people can use to make or obtain what they want.

• In economics we study how we use scarce resources

• Choices can be painful

Land

Labor(The available time of workers)

Capital ($, machinery, buildings, and other man-made productive assets)

Human Capital (The educational achievements and skill of workers)

How Do We Satisfy Our Wants?

• Suppose we had an infinite supply of resources. Would a problem exist?

• YES!

• The basic problem in economics is not a lack of resources, but our limitless wants.

Scarcity

Unlimited Wants vs.

Limited Resources

Core Economic Principle #1 People Choose

• We always want more than we can get and productive resources (human, natural, capital) are always limited. Therefore, because of this major economic problem of scarcity, we usually choose the alternative that provides the most benefits with the least cost.

Wants vs. Needs

• Needs = Survival needs, food, shelter, clothing, etc.

• Wants = Anything else

We’re perpetually in a state of hunger.

• We always want more stuff.

• As a result, scarcity governs us.

• Scarcity forces us to make choices and prioritize needs and wants.

Core Economic Principle # 2All Choices Involve Costs

• The opportunity cost is the next best alternative you give up when you make a choice. When we choose one thing, we refuse something else at the same time.

Opportunity Cost

•The value of the next best alternative that had to be given up for the alternative that was chosen.

When You Choose You

Lose

• “How Much”? Is a decision at the margin.

• “Either-or” vs. “How Much”

• “How Much” decisions involve a trade-off– A comparison of costs

vs. benefits

Decisions at the Margin

Incentives Matter

• When changes in the available opportunities offer rewards to those who change their behavior, we say that people face new incentives.

• Economists are skeptical of any attempt to change people’s behavior that doesn’t change their incentives.

Resources

Finite World

Choices

Scarcity

Wants and Needs

Opportunity Cost

Decision Making