Unit 1: The Nature and Importance of Economics

OutlineReview of Chapter 15 Key Principles of EconomicsPrinciple of Opportunity Cost

◦ Production PossiblitiesMarginal Principle

◦ Marginal Benefit vs Marginal CostRemaining Principles

◦ Principle of Diminishing Returns◦ Spillover Principle◦ Reality Principle

Class Activity

Review of Chapter 1Economics = study of the

choices made when there is a scarcity of resources.

Choices: An economic decision always aims to answer one of the following Qs:1. What to produce?2. How to produce it?3. Who will consume this product?

Review of Chapter 1

Scarcity: when the availability of a resource is limited, we must make sacrifices◦ One good/service for another◦ Example: a city has a limited amount of land, and must

decide whether to build more parks, or more apartments

Resources: There are 5 categories of resources used to produce goods (Factors of Production):

1. Natural Resources2. Labor3. Physical Capital4. Human Capital5. Entrepreneurship

Review of Chapter 1Market = an arrangement that allows

buyers and sellers to exchange things◦Trade what you have for what you want◦Most economic decisions (the 3 Qs) are made

in, or are influenced by markets

Marginal = a small amount◦marginal change is a change in one unit of a

variable.◦marginal analysis is used to analyze how a

change in one unit of a variable causes a change in another

5 KEY PRINCIPLES OF ECONOMICS

Principle of Opportunity Cost

No matter what decision we make, there is always a trade-off◦“No such thing as a free lunch”

Any time we acquire something, we have used up a resource that could have been used to acquire something else◦Ex: listen to a sales pitch for a free sample.

What has been sacrificed?

Opportunity Cost = what you sacrifice in order to get something

Principle of Opportunity CostWhen we make a decision, we are

choosing something over an alternative

To determine the opportunity cost, we look at the best alternative◦Ex. Studying for Economics exam

instead of studying for History, or playing video games. What is the opportunity cost? Can we quantify it?

Production Possibilities Curves

Principle of Opportunity CostYour turn:

◦What could be the opportunity cost of a part-time job while attending University? There are many possibilities

Marginal PrincipleHelps make economic decisions easierEconomists consider how a one-unit

(marginal) change in one variable affects the value of another variable◦Ex: Should a store-owner keep his shop open

one hour longer?We must compare the marginal

benefit with the marginal cost◦Benefit = the extra bonus that results from

the small change◦Cost = the additional costs associated with

the small change

Marginal PrincipleMarginal principle = increase the level of

an activity its its marginal benefit exceeds its marginal cost. If possible, choose a level of production where the marginal benefit equals the marginal cost.

Marginal Cost

Marginal Benefit

Key Principles of EconomicsPrinciple of Diminishing Returns

◦ When there are two or more inputs involved in producing something (output)

◦ If we continue to increase only one input, eventually a point is reached where the output increases by smaller, and smaller amounts

Key Principles of EconomicsSpillover Principle

◦The costs or benefits of producing something, sometimes spill over to people or organizations that are not involved in producing or consuming them

Reality Principle◦What matters to people is the real

value of money or income. In other words, its purchasing power. How much can I get for the money I

have?

Critical Thinking ActivityRead p. 31 in your textbook

◦“ Why Are We Getting Bigger?”

Imagine you are an organization hired by the national government to solve this issue. Propose a solution that makes use of the principle of opportunity cost and marginal principle.