Economic Chapter 1
Economic Chapter 1
Economic Chapter 1
Introduction
Introduction
Economics: Studying
Choice In a World of Scarcity
Economics: Studying
Choice In a World of Scarcity
Wants vs. Resources
Scarcity
Choices
Economics: Studying
Choice In a World of Scarcity
Economics
The study of how people make choices
under conditions of scarcity and of the
results of those choices for society.
Economics: Studying
Choice In a World of Scarcity
Economics: Studying
Choice In a World of Scarcity
Question
Economics: Studying
Choice In a World of Scarcity
Observations
The best class from an economic point
of view will generally not be the same as
the best size from the point of view of
an educational psychologist.
People will feel differently about the
value of smaller classes.
Economics: Studying
Choice In a World of Scarcity
Application
What other examples of scarcity and
trade-offs can we identify?
Economics: Studying
Choice In a World of Scarcity
Rational Person
Someone with well-defined goals who
tries to fulfill those goals as best he or
she can
Question
Will everyone choose to buy the
computer game downtown?
Economic Surplus
The benefit of taking any action minus
its cost
The goal of economic decision makers is
to maximize their economic surplus
Opportunity Cost
The value of the next-best alternative
that must be forgone to undertake an
activity
Question
What is the opportunity cost of buying
the game downtown?
Assume
The benefit of buying the game
downtown is $10
The cost of making the trip is $12
Questions
What is your economic surplus from
buying the game downtown?
Where should you buy the game?
Observation
The cost-benefit principle suggests that
we take only those actions that create
additional economic surplus.
Assume:
Round trip airfare is $500 and is equal to
your frequent flyer coupon
Other costs equal $1,000
Benefits = $1,350
Cost = $1,400 ($400 opportunity cost + $1,000
other costs)
Question
Assume:
Price = $5
20 randomly selected guests will get lunch
on the house
Question:
Costs
$20 billion (average of $5 billion/launch)
Total Cost
Average Cost
Marginal Cost
($ billion)
($ billion/launch)
($ billion/launch)
3.5
3
4
5
8
12
3
4
12
32
6.4
Normative Economics
vs. Positive Economics
Economics:
Micro and Macro
Microeconomics
The study of individual choice under
scarcity and its implications for the
behavior of prices and quantities in
individual markets
Economics:
Micro and Macro
Macroeconomics
The study of the performance of
national economies, and of the policies
that governments use to try to improve
that performance
Economic Naturalism
Economic Naturalism
Question
Why do so many computer hardware
manufacturers include more than
$1,000 worth of free software with a
computer selling for only slightly more
than that?
Economic Naturalism
Questions
Why dont automobile manufacturers
make cars without heaters?
Why do the keypad buttons on drive-up
automatic teller machines have Braille
dots?
Economic Naturalism
Applications
Use cost-benefit analysis to explain
some pattern of events or behavior you
have observed in your own environment