the basics of economics (chapter 1)pnhs.psd202.org/documents/sbarber/1503402308.pdf · 3 are these...
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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 it’s impossible for
economists not to take a stand.”
• Tim Hartford (author of The Undercover
Economist)
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EconomicsThe study of how society
manages its scarce resources
by making decisions.
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Are these scarce?
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
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Yes! All goods and services are scarce!!!
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
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Scarcity
Since all resources in the world are limited, we
are limited into how much we can produce.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
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Good Service
To get the benefit, you
must actively use it
To get the benefit,
someone or something
does it for you
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So back to what economics is…
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
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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 three
questions to ask yourself when deciding
what is best for society?
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MICROECONOMICS is based on the same concept but the decisions that
are made are on a much smaller scale…(Individual, Firms, etc).
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
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© 2007 Thomson South-Western
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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© 2007 Thomson South-Western
2. The Factors of Production
LAND LABOR CAPITAL
The resources that are used to produce
goods and services
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© 2007 Thomson South-Western
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. Barber
teaching the most awe-inspiring lessons in the
history of education.
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© 2007 Thomson South-Western
4. Market
•A group of buyers (consumers) and sellers
(producers) of a particular good or service
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© 2007 Thomson South-Western
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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© 2007 Thomson South-Western
Household or Firm?
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Household or Firm?
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© 2007 Thomson South-Western
6. Society and Scarce Resources
• The management of society’s 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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© 2007 Thomson South-Western
Basic Principles of Economics
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© 2007 Thomson South-Western
Principle #1: People Face Trade-offs
• Also known as costs
• 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 evenly among the members of society.
Brain Drain!
If society decides to be more equitable,
what will happen to efficiency?
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© 2007 Thomson South-Western
Result…
Equity Efficiency
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© 2007 Thomson South-Western
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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© 2007 Thomson South-Western
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?
You
decide to
buy a
$50,000
car.
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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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© 2007 Thomson South-Western
• Marginal changes are small, incremental
adjustments to a decision.
People make decisions by comparing
costs and benefits at the margin.
Principle #3: Rational People Think at the Margin.
Example: Should I hire one more additional worker?
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© 2007 Thomson South-Western
Principle #4: When making decisions, people use the Cost Benefit Analysis
• When thinking at the margin, you only add one
more unit if the marginal benefit (MB) >
marginal cost (MC).
• Keep adding units until the MB = MC
• MC should never be greater than the MB.
• Benefits can also be called incentives.
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© 2007 Thomson South-Western
What if….
Marginal Cost = $2,000
Marginal Benefit = You play the
game for a month and quickly lose
interest (is that really worth $2,000?)
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© 2007 Thomson South-Western
Principle #5: Trade Can Make Everyone Better Off.
• Trade allows people to specialize in what they
do best.
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© 2007 Thomson South-Western
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.
• 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
Hey Congress, that’s
smart because I am
only going to produce
what keeps my business
running. So, most of
society will get what
they want.
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© 2007 Thomson South-Western
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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© 2007 Thomson South-Western
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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© 2007 Thomson South-Western
Principle #7: Governments Can Sometimes Improve Market Outcomes.
• Market failure may be caused by:
• an externality, which is the impact of one person or
firm’s actions on the well-being others.
• market power, which is the ability of a single
person or firm to unduly influence market prices.