Introduction to Economics

What is Economics?

Economics is the study of how to allocate (spread/distribute) scarce resources among competing wants and needs.

What does that mean?

Less Formally...

There is not enough of everything that people want (and need) to go around.

Some people will get things and others will not. Certain products will be produced and others will not. That is a fact. The question is then, how do we determine who gets what.

How Do Economists Think - Scarcity and Goods

Scarcity is at the heart of economics. If there were no scarcity, there would be no need for economics.

Scarcity arises because society does not have enough resources to produce all the things people would like to have.

These things are called goods. Goods are any items that are desired by people.

The Economic Questions

What to Produce?

How to Produce?

For Whom to Produce?

How Do Economists Think - Utility and Rationality Economists assume that people act to

maximize their own happiness Utility- The usefulness of a product ( or the

satisfaction gained from something) We also assume all people act rationally

(make good decisions based on self-interest).

How Do Economists Think - Resources

Resources- the raw elements that go into the production of a good or service.

YOU CAN NOT CREATE A GOOD WITHOUT RESOURCES!!!

Four Resources or Factors of Production

Land - Natural Resources (raw materials)

Labor - Skills of People Capital - Goods Used To Make Other

Goods (not money) Entrepreneurs – Risk takers who start

new businesses or bring in new products in search for profits.

How Do Economists Think - Rationing Device

How do we decide who gets what? A rationing device is a process by

which we determine who gets what. It could be coupons, a line, height, or alphabetical order. What is the rationing device for most goods in the U.S. economy?

-Price

TINSTAAFL

There is no such thing as a free

lunch!What does this mean?

Trade OffsMaking choices of how to spend

money or time. You cannot have everything, so you have to choose.

Opportunity Cost

Opportunity Cost – The value of the action not taken.

Remember Smoking?

A life time of smoking has an opportunity cost of 1.75 million dollars.

Decisions Made at “The Margin” An economist is always thinking

dynamically. Asking themselves “what next?”

You have to think this way in this class.

Incentives

Economists always think about incentives. They believe that people respond to incentives.

Incentives- something that encourages a certain type of behavior.

Incentives - Example

For instance if I offered you an A in this class for $5, many of you would pay me.

NOT GOING TO HAPPEN.

What is the incentive for you in this class? Grades? Knowledge?

Types of Economics

Microeconomics - Studies the behavior of individual people and firms.

Macroeconomics - Studies the behavior of entire economies as a whole.