Unit I: Basic

Economic Concepts
 What is Economics in General?
• Economics is the science of scarcity.
• Scarcity is the condition in which our wants
are greater than our limited resources.
• Since we are unable to have everything we
desire, we must make choices on how we will
use our resources.
• In economics we will study the choices of
individuals, firms, and governments.
choices
Economics is the study of _________.
4 Key Economic Assumptions
• People are RATIONAL.
• People are GREEDY (wants =
unlimited).
• People act in their own SELF-
INTEREST.
• RESOURCES are SCARCE.
Examples:
You must choose between buying jeans or buying shoes.
Businesses must choose how many people to hire
Governments must choose how much to spend on welfare.

Economics Defined
Economics-Social science concerned with the
efficient use of limited resources to achieve
maximum satisfaction of economic wants.
(Study of how individuals and societies deal
with ________)
scarcity
 Micro vs. Macro
MICROeconomics-
Study of small economic units such as
individuals, firms, and industries (competitive
markets, labor markets, personal decision
making, etc.)

MACROeconomics-
Study of the large economy as a whole or in
its basic subdivisions (National Economic
Growth, Government Spending, Inflation,
Unemployment, etc.)
 Marginal Analysis
In economics the term marginal = additional
“Thinking on the margin”, or MARGINAL ANALYSIS
involves making decisions based on the additional
benefit vs. the additional cost.

Marginal Cost(MC):

Marginal Benefit(MB):
 TERMS:
• Utility: the ability of a good or service to
SATISFY a need/want = satisfaction
• Marginal: “one more unit” of something; the
difference between two things
• Marginal analysis: what’ll happen if I
produce or consume one more unit
• Marginal cost – the cost of producing or
consuming one more
• Marginal benefit – the benefit of producing
or consuming one more
 THE LAW OF DIMINISHING
MARGINAL UTILITY

• THE LAW OF DIMINISHING

MARGINAL UTILITY - each
additional unit provides less

UTILITY or SATISFACTION
 Thinking at the Margin
# Times Benefit Cost
Watching Movie

1st $30 $10

2nd $15 $10
3rd $5 $10
Total $50 $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.
 5 Key Economic Assumptions
1. Society’s wants are unlimited, but ALL resources
are limited (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 acts rationally by comparing the marginal
costs and marginal benefits of every choice
5. Real-life situations can be explained and analyzed
through simplified models and graphs.
Given the following assumptions, make a
rational choice in your own self-interest (hold
everything else constant)…
1. You want to visit your friend for the
weekend
2. You work every weekday earning $100 per
day
3. You have three flights to choose from:
Thursday Night Flight = $300
Friday Early Morning Flight = $345
Friday Night Flight = $380

Which flight should you choose? Why?

11
 Trade-offs
ALL decisions involve trade-offs.
Trade-offs are all the alternatives that we give up
whenever we choose one course of action over others.
(Examples: going to the movies)

The most desirable alternative given up as a result of a

decision is known as opportunity cost.

What are trade-offs of deciding to go to movie?

What is the opportunity cost of going to movie?

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The Factors of Production

13
 The Production
Possibilities Curve
(PPC)
Using Economic Models…

14
What is the Production Possibilities Curve?
• A production possibilities graph (PPG) is a
model that shows alternative ways that an
economy can use its scarce resources
• This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.

4 Key Assumptions
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus)
• Fixed Technology
15
 Production “Possibilities” Table
a b c d e f
Bikes 14 12 9 5 0 0
Computers 0 2 4 6 8 10

Each point represents a specific

combination of goods that can be
produced given full employment of
resources.
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis
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 PRODUCTION POSSIBILITIES
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
A (given current resources)
14
B
12
G
10 C
Bikes
8
Efficient
6 D

4 Inefficient/
Unemployment
2
E
0
0 2 4 6 8 10
Computers 17
 Opportunity Cost
Example:
1. The opportunity cost of
moving from a to b is… 2 Bikes
2.The opportunity cost of
moving from b to d is… 7 Bikes

3.The opportunity cost of

moving from d to b is… 4 Computers

4.The opportunity cost of

moving from f to c is… 0 Computers
5.What can you say about point G?
Unattainable

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The Production Possibilities
Curve (or Frontier)

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 PRODUCTION POSSIBILITIES
A B C D E
CALZONES 4 3 2 1 0
PIZZA 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Constant Opportunity Cost- Resources are
easily adaptable for producing either good.
• Result is a straight line PPC (not common)

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 PRODUCTION POSSIBILITIES
A B C D E
PIZZA 18 17 15 10 0
ROBOTS 0 1 2 3 4
• List the Opportunity Cost of moving from a-b,
b-c, c-d, and d-e.
• Law of Increasing Opportunity Cost-
• As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
• Why? Resources are NOT easily adaptable
to producing both goods.
• Result is a bowed out (Concave) PPC
 PER UNIT Opportunity Cost
How much each marginal = Opportunity Cost
unit costs Units Gained

Example:
1. The PER UNIT opportunity cost
of moving from a to b is…
1 Bike
2.The PER UNIT opportunity
cost of moving from b to c is…
1.5 (3/2) Bikes
3.The PER UNIT opportunity
cost of moving from c to d is…
2 Bikes
4.The PER UNIT opportunity
cost of moving from d to e is…
2.5 (5/2) Bikes
NOTICE: Increasing Opportunity Costs 22
 QUIZ
1. The factors/resources of production are,
a.
b.
c.
d.

2. PRODUCTION POSSIBILITIES

A B C D E

SHOES 22 19 14 8 0

PENCIL 0 3 6 9 12

Draw the production possibility curve according to the information above and,

a. opportunity cost of moving from b to d is …

b. opportunity cost of moving from e to c is …

c. Is PPC straight or bowed-out? Why? 23