2. Economics
• The study of the use of scarce resources that have
alternative uses
Scarce resources –
• Natural Resources (land, water, oil, etc.)
• Human Resources (workers, entrepreneurs, etc.)
• Capital Resources (money, machinery, etc.)
Alternative uses –
• Wood (paper, furniture, houses, etc.)
• Steel (automobiles, desks, etc.)
• Money (buying more inventory, hiring more workers,
how much to advertise, etc.)
6. Principle #1:
Scarcity Forces Tradeoffs
• Scarcity – not enough resources to do
everything we would want to do
• Those resources have alternative uses
• When you choose to use a given resource for
something, you are unable to use that
resource for anything else
• Whenever you choose one thing over
another, you are making a tradeoff
Scarcity
7. TANSTAAFL
• “There Ain’t No Such Thing As A Free
Lunch”
• Every choice someone makes involves
tradeoffs, whether they realize it or not
• Example: you get a free lunch
– Lunch might be free to you.
– Someone, however, had to pay for that lunch.
– That someone had to give up something (payment
for lunch, eating that lunch him/herself, etc.) in
order for you to get it for free.
8. Opportunity Cost
• The “value” of the next most likely choice for the use of a
resource that is given up when making a choice
• Example:
• Imagine you have $5.00. You could do the following with it
(in this prioritized order):
• Spend it on a snack at Sheetz/Handy Mart
• Spend it on a snack at a fast food restaurant
(McDonald’s, Arby’s, KFC, Taco Bell, etc.) on their Value
Menu
• Spend it on admission to the next home sporting event
• Save it to buy gas later in the week
By choosing to spend it on a snack at Sheetz/Handy Mart, the
opportunity cost is not being able to spend it at one of the
fast food restaurants (the second most likely choice).
Opportunity Cost
9. Principle #2:
Costs Versus Benefits
• The scarcity-forces-tradeoffs principle forces
us to make choices
• Economists assume that individuals make
choices based on expected costs and benefits
– Costs: what you spend in time, money, or other
sacrifices to get your choice
– Benefits: what you gain from something in terms
of money, time, experience, or other
improvements in your situation
• People choose something when the benefits
of doing so are greater than the costs
10. Cost-Benefit Analysis
Example #1: You have $20 and are considering spending it on gas
for your car.
Costs:
• Won’t have money to go out on a date this weekend or other
entertainment
Benefits:
• Go where you want to go & Won’t have to get a ride from
parents
11. Example #2: Start my own
business.
Costs:
Come up with start up funding and
may to take out a loan
Lots of time and energy & not
guranteed to make $$ & High risk
Benefits:
Will be own boss & Make all of
the decisions
Pride of ownership & It’s your
passion & You reap the $$
rewards
12. Video & Assignment
Decision Making:
Scarcity, Opportunity Cost, & You
And Video
http://www.learner.org/series/econusa
/video/?pid=2466&uid=14&unit=Resou
rces%20and%20Scarcity
13. Principle #3:
Thinking at the Margin
• Thinking at margin is deciding to add (or
subtract) one more unit to (or from) what we
already have
• Examples
14. • Compare marginal costs and marginal benefits
Example #1: Getting another pair of shoes
• Marginal Costs:
• Having as much money to put gas in car
• May not be able to have money to go out on a date
• If saving for a goal, may not be able to put as much
toward that goal
Marginal Benefits:
• Shoes may be more comfortable than other pairs you
have
• Provides more flexibility in putting together outfits to
wear
• May be more fashionable (status symbol)
15. Diminishing Marginal Utility
• Marginal Utility
– The extra satisfaction or benefit you will get from
an increase of an additional unit of a good or
service
– Essentially your perceived difference between the
marginal benefit and marginal cost from that
additional unit
16. • Law of Diminishing Marginal Utility
– “You can have too much of a good thing”
19. How Clean is Clean Enough?
Statement 1: Local Lake is a disaster. It was once a
beautiful, clean area where you could drink the
water safely. Now it is dirty from overuse, soil
runoff, and overflow from septic tanks. The
County Council should clean the lake completely:
100% clean. The technology and know-how are
available. There is no excuse for not doing the job
completely.
Statement 2: We can clean up most of the pollution
in the lake for 1/3 of what it would cost to clean it
completely. It may be too costly to clean the lake
completely. Resources are scarce. If the County
Council overspends for the environment, it can
accomplish less in other areas that are
important, too.
20. Principle #4:
Incentives Matter
• Incentive – something that motivates a person
to take a particular course or action
• People respond to incentives in generally
predictable ways
• Incentives can be both positive
(rewards/benefits) and negative
(punishments/costs)
– Negative incentives sometimes called
disincentives
22. Principle #5:
Trade Makes People Better Off
• Adam Smith quote “It is the maxim of every
prudent master of a family never to attempt
to make at home what it will cost him more to
make than to buy.”
Retrieved from http://app.discoveryeducation.com/search?Ntt=adam+smith on
January 30, 2014.
23. Principle #6:
Markets Coordinate Trade
• Market – any arrangement that brings
together buyers & sellers to do business with
each other
24. • When markets operate freely or with limited
government interference, buyers & sellers can
trade with each other until both are satisfied
with their sales & purchases
– Result is efficient market that serves everyone’s
interests without guidance from a person or
institution
• Markets usually do better than anyone or
anything else at coordinating exchanges
between buyers & sellers
• Free Market Economy
25. Principle #7:
Future Consequences Count
• Decisions made today have consequences not
only for today but also for the future
– Many only look at immediate costs & benefits
– Must also consider long-term effects
• Law of Unintended Consequences
– Actions of people and governments always have
effects that are not expected
– Economists spend much of their time trying to
predict these unintended consequences
26. Example:
A few years back, the Winchester City Council passed an
increase in the tax per pack on cigarettes, claiming it would
raise $X amount of revenue (based on current cigarette sales
volume). After a year or so, the amount of tax revenue from
cigarette sales by the city did go up, but not nearly as much
as was estimated when the tax was proposed. What actually
was happening was that people were going to buy their
cigarettes in the county. Although the amount of tax
collected did go up because more was being collected per
pack of cigarettes sold, less cigarettes were being sold in the
city. This hurt those business owners selling cigarettes
because this drove sales away from them, and they made
less money from cigarette sales (less overall revenue to pay
rent, pay/hire workers, profit, etc.). Those arguing against
raising the prepared meal (i.e. restaurant) tax are arguing
that this raise would have a similar effect on those small
businesses serving food.
Notas del editor
Examples of microeconomics:How will an increase in the price of wheat affect sales of bread for an individual business that uses bread (or for the bread industry as a whole)What happens when a business charges more for a product than many people are willing to payExamples of macroeconomics:What effect does an increase in taxes have on the economy as a whole?What effect does an change in interest rates have on borrowing, saving, & investing in an economy?
Review details of example on pp. 5 – 6 of Econ Alive (Textbook)
Possible examples to use:
Do an example on the board as a class.Possible examples:Example #2: A business is considering hiring an additional employee:Marginal Costs:Dollar cost for direct employee wages, payroll taxes (employer contributions to Social Security, Medicare, Unemployment, etc.), dollar cost for providing health insurance or paying penalty if not provided (PPACA), etc.Less money available for inventory purchases, advertising, rent, & other expensesMarginal Benefits:Employee will be productive enough to increase revenues that will cover all of the employee costs and still generate a profit (may not be immediate, but anticipated to happen long-term)Employee’s presence will enhance ability of business to serve customers better, thereby making them happy, returning customersA business will take on an additional employee if it believes that the employee will produce enough to pay for his/her costs and the desired return on investment for that business; if not, the business will not hire that additional employee.
Possible Examples:
Example #1: Adding additional hours of study to your day1stadditional hour – marginal benefit pretty good (more homework done, more prep for a test), marginal cost minimal (one less hour of TV or other recreational activity)2nd additional hour – marginal benefit less (homework already done, realize you know most of what you need to for the test), marginal costs getting higher (having to give up time with friends, maybe get less sleep)3rd, 4th, 5th, etc. additional hour – marginal benefit even less (no homework left, not really getting anything out of additional study), but the marginal costs are getting even higher (even less sleep, skipping meal, not showering, etc.) and the costs start outweighing the benefitsExample #2: A business considers adding additional employees (like fast food or retail)1st additional employee – able to help more customers, reduce wait times, keep stock levels at necessary levels2nd additional employee – can do all 1st additional employee does, but there may not be that much additional demand to help customers and keep stock levels up and was needed with the 1st additional employee3rd, 4th, 5th employee, etc. – still have same potential benefits as with 1st & 2nd additional employees, but there may not be customer demand to really make an impact on customer satisfaction, and employees have little or nothing to doThe business will want to add additional employees so long as the benefits of keeping the customers satisfied and stock levels at level needed outweigh the cost of adding that employee (wages, etc.).
Examples:Positive incentives:Awards for performance (medals, trophies, etc.)Good gradesFree stuff with the purchase of other stuffCash back rewards on credit cardsNegative incentives (disincentives):Fines and jail time for breaking the law (speeding ticket, etc.)Poor gradesLate payment fees and penalties on billsPeer pressure serves as a big incentive or disincentive in students’ lives (fashion, hobbies, activities, etc.)
Adam Smith quote (from p. 9 in book): “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”
