Unit 1: Fundamentals of EconomicsUnit 1: Fundamentals of Economics

What is What is Economics?Economics?

Please take out…

Notebook

Summer Assignment (Fact Sheets)

Please DO NOT OPEN THE BAG!

The Great Food Trade-off!The Rules

• Your group must decide how to divide what’s in the bag.

• You may NOT trade with other groups.

• You do NOT have to divide things equally.

• You may trade for things not in the bag (as long as they

do not violate school rules).

• You must REMEMBER what happened during the trade

off.

• NO EATING UNTIL MS. C SAYS SO!!!

The Great Food Trade-off!In your notebook, jot down what

happened.

• Did you like the items that were in your original bag?

• How did your group decide what to do?

• Did you get what you wanted?

• Were things divided or decided upon fairly?

• What motivated you to trade for or to keep an item?

What is Economics?• You just demonstrated every basic

principle of economics!!!

• Economics – The study of people producing and

exchanging to get the goods and services they want.

Thinking Like an Economist1. Everything has a cost.2. People choose for good reasons.3. Incentives matter. 4. People create economic systems to

influence choices and incentives.5. People gain from voluntary trade. 6. Economic thinking is marginal

thinking. 7. The value of a good or service is

affected by people’s choices. 8. Economic actions create secondary

effects.

Economics as a Social Science• Social Science

– The study of human societies– i.e. History, Government/Politics, Sociology,

Psychology, Anthropology, ECONOMICS– Rigorous, quantifiable, methodical BUT

hard to isolate variables/control external factors

Economics as a Social Science• Methodology in Economics (as a

social science)– Organize reality in a rational way (based on

observation and data)– Look for patterns and trends– Develop a hypothesis/create a model– Test the model through data collection

• ceteris paribus – “all other things equal”

• Correlation vs. Causation

Economic Models• Abstractions of behavior• Way of simplifying reality (which is

infinitely complex)• Able to focus on key variables

(ceteris paribus)

• “Behavior of the herd”– NOT individual action

Positive vs. Normative• What is the difference between

positive and normative statements?

• Which is which?– The legal minimum wage should be raised to

give working people a decent income.– The consumer price index rose 1.2% last month.– The unemployment rate of 6.8% is too high.– The average rate of interest on loans is 4.6%.– The economy grew at an annual rate of 3.6%– People consume too much of their income and

don’t save enough.

Describing Economics

• Microeconomics– Studies these

exchanges on an individual basis

– Focuses on people and businesses

• Macroeconomics– Studies these

exchanges on an large scale

– i.e. country, region, world

– Looks at economy as a whole

The Fundamental Problem in Economics

• SCARCITY!– Limited resources vs. unlimited wants– Without scarcity, there would be no

economics!

• EVERYTHINGEVERYTHING IS SCARCE!– But may be relatively more or less scarce

depending on where you are

The Fundamental Problem in Economics

• Okay, so maybe not everything…– Opposite of scarcity is ABUNDANCE

• Scarce goods = economic goods

• Abundant goods = free goods– Can you think up examples of free goods?– Is air a free good?– Free goods have no cost, since cost is a way to

figure out who gets what

• REMEMBER Pretty much everything is scarce

Getting back to the problem…

• Scarcity forces choices• Choices result in trade-offstrade-offs

– Giving up other options for the one you chose

“THERE IS NO SUCH THING AS A FREE LUNCH.”

• Opportunity Cost the cost of you 2nd choice– So, if you choose Option A you had to forgo (give up)

Option B– Does NOT include anything you could have done:

just the next best thing you would have done

THE 3 Economic Questions• Scarcity triggers 3 key questions:

What to produce?What to produce?

For whom to produce?For whom to produce?

How to produce?How to produce?

• Economic systems differ from each other in how they answer THESE questions– US, Cuba, North Korea, Germany, Saudi Arabia

answer these questions differently

If there are “goods”, are there “bads”?

• Goods– Physical (tangible) products

• Services– Products you can’t touch– E.g. designer, plumber, teacher, taxi driver,

editor

• Product– Something we produce– Can be either a good or a service

Where does economics happen?• Market

– An arrangement that allows exchanges to take place

• Voluntary Exchange

• Market Economy– Uses voluntary exchange in markets as the

primary means of organizing production

Where does your good come from?

• Pick one good from your bag.

• On a piece of newsprint, draw the steps that product took to get to you. (Illustrations are better than words!!)

Factors of Production aka Productive Resources

• Natural resources

• Human resources

• Capital resources

• Entrepreneurship