The Basics of Economics (Chapter 1)

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The Basics of Economics (Chapter 1)
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• Billions of people could benefit from better
  economic policies. Millions are dying because of
  bad ones. Sometimes the logic of economics is so
  compelling that its impossible for economists
  not to take a stand.
• Tim Hartford (author of The Undercover Economist)

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Economics

• The study of how society manages its scarce
  resources by making decisions.

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Are these scarce?
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Yes! All goods and services are scarce!!!
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Service
Good
Something that you can use or consume
Something that is done for you
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So back to what economics is
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Lets pretend you have found a new tropical island
that is inhabited by strange individuals...These
people need so much help that they gave you the
power to make all of their societal decisions.
Currently, the society relies on themselves and
their surroundings. Based on all of this info,
what are your first areas of concern as the
leader of this society?
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MICROECONOMICS is based on the same concept but
the decisions that are made are on a much smaller
scale
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1. Key Economic Questions

• Society faces many decisions
• What goods and services will be produced?
• Who will produce the goods and services?
• Who will consume the goods and services?

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2. The Factors of Production
The resources that are used to produce goods and
services
LAND
CAPITAL
LABOR
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3. Physical vs. Human Capital

• Physical Capital are the man made assets that are
  used in production.
• Ex. shovel, nail, plastic, etc.
• Human Capital is the knowledge that is needed in
  production.
• Ex. a doctor administering an X-Ray, Mr. Vesper
  teaching the most awe-inspiring lessons in the
  history of education.

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4. Market

• A group of buyers (consumers) and sellers
  (producers) of a particular good or service

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5. The People Who Make Up A Market

• Households
• Consumer of goods and services.
• They ARE the factors of production.
• Firms
• Producers of goods and services.
• They USE the factors of production.

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Household or Firm?
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Household or Firm?
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6. Society and Scarce Resources

• The management of societys resources is
  important because resources are scarce.
• Scarcity. . . means that society has limited
  resources and therefore cannot produce all the
  goods and services people wish to have.

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Basic Principles of Economics
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Principle 1 People Face Trade-offs
Basket of Knowedge! If society decides to be
more equitable, what will happen to efficiency?

• What you give up because of a decision
• Efficiency v. Equity
• Efficiency means society gets the most that it
  can from its scarce resources.
• Equity means the benefits of those resources are
  distributed fairly among the members of society.

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Result
Equity
Efficiency
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Principle 2 The Cost of Something Is What You
Give Up to Get It.

• Basketball star LeBron James decided to give up
  college and play pro basketball. So, what was
  his cost? Do you think that was the correct
  decision?

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Opportunity Cost
The MOST desirable alternative that is given up
because of a decision
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Which is the opportunity cost of this decision?
1. You cant go on your dream vacation
2. You will be paying off the car for over 35
years
You decide to buy a 50,000 car.
3. You cant buy season tickets to your favorite
sports team
4. You cant afford your much needed open heart
surgery, oops youre dead
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High Opportunity Cost
Low Opportunity Cost
Should I rob a bank?
Should I steal one strawberry from the produce
section at Jewel?
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Principle 3 Rational People Think at the Margin.

• Marginal changes are small, incremental
  adjustments to a decision.

Example Should I hire one more additional worker?
People make decisions by comparing costs and
benefits at the margin.
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Principle 4 When making decisions, people use
the Cost Benefit Analysis

• When thinking at the margin, you only add one
  more unit if the benefit is still larger than the
  cost.
• Benefits can also be called incentives.

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What if.
Marginal Benefit You play the game for a month
and quickly lose interest
Marginal Cost 2,000
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Principle 5 Trade Can Make Everyone Better Off.

• Trade allows people to specialize in what they do
  best.

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Principle 6 Markets Are Usually a Good Way to
Organize Economic Activity.
Hey Congress, thats smart because I am only
going to produce what keeps my business running.
So, most of society will get what they want.

• A market economy is an economy that allocates
  resources through the decentralized decisions of
  many firms and households as they interact in
  markets for goods and services.

I will let the citizens decide how to answer the
key economic questions
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Principle 6 Markets Are Usually a Good Way to
Organize Economic Activity.

• Adam Smith made the invisible hand theory.
• Because households and firms look at prices when
  deciding what to buy and sell, they unknowingly
  regulate the market.

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Principle 7 Governments Can Sometimes Improve
Market Outcomes.

• Markets work only if property rights are
  enforced.
• Property rights are the ability of an individual
  to own and exercise control over a scarce
  resource
• Market failure occurs when the market fails to
  allocate resources efficiently.
• When the market fails (breaks down) government
  can intervene to promote efficiency and equity.

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Principle 7 Governments Can Sometimes Improve
Market Outcomes.

• Market failure may be caused by
• an externality, which is the impact of one person
  or firms actions on the well-being others.
• market power, which is the ability of a single
  person or firm to unduly influence market prices.

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Principle 8 A Countrys Standard of Living
Depends on Its Ability to Produce Goods and
Services.

• Almost all living standards are linked to the
  countries productivity.
• Productivity is the amount of goods and services
  produced from each hour of a workers time.