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Chapter 1 - An introduction to the economic way of thinking. After completing this unit, you should be able to: Define economics, explain how scarce resources influence choices, describe the influence of benefits and costs on deciding among alternatives, identify the decision rules individuals and firms use to make choices,…
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter An Introduction to the Economic Way of Thinking Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: © Shuan Lowe/iStockphoto PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Ø Ø Ø Define economics Explain how scarce resources influence choices Describe the influence of benefits and costs on deciding among alternatives Ø Ø Explain why decisions are made “at the margin” Assess the general conditions that generate maximum utility or profits Identify the decision rules individuals and firms use to make choices Copyright © 2013 John Wiley & Sons, Inc Definition of economics Ø Economics is the study of choices Economics is a tool or way of looking at the world q Economics help us to understand all kinds of choices q Copyright © 2013 John Wiley Microeconomics and Macroeconomics Ø Ø Macroeconomics deals with choices that societies make Microeconomics deals with the choices individuals, households, and businesses make Copyright © 2013 John Wiley Why Study Economics? Ø Improve decision-making skills Ø Improve critical thinking skills Ø Develop analytical and quantitative skills Ø Understand many current issues Ø Approach controversial issues with objectivity and clarity Ø Prepare for graduate school in many fields Ø Better job opportunities Copyright © 2013 John Wiley Scarcity Ø Ø Scarcity occurs when we have fewer resources than we have uses for those resources Scarcity implies choices Copyright © 2013 John Wiley Three basic economic resources Ø Ø Ø Labor – laborers combine time and energy to produce goods or services Land – including natural resources, water, and clean air Capital - long-lasting tools or skills used in producing goods and services Copyright © 2013 John Wiley How choices are made? Decision makers make choices by comparing benefits and costs Ø Ø Ø Benefit of a choice is what you gain when you make the choice Cost of a choice is what you give up to make the choice Utility - the satisfaction or happiness individuals get from their choices Profit - the difference between the earnings and the costs of production Copyright © 2013 John Wiley Ø Opportunity cost Ø The opportunity cost of a choice is the value of the next-best alternative foregone Opportunity cost is a valuation of the next-best alternative opportunity not chosen What’s the opportunity cost of going to college? Copyright © 2013 John Wiley Opportunity cost of college Private Public Tuition & fees $27,000 $7,600 Books and Supplies Estimated wages with HS Diploma $1,000 $28,000 $1,000 $28,000 Annual Total $56,000 $36,600 $224,000 $146,400 $350.00 $228.75 Four Years Total Class days: 32 weeks x = 160 days/yr x = 640 days Cost of Missing One Day Class: Copyright © 2013 John Wiley 10 economic way of thinking “Incentives Matter” Ø Ø Ø When people respond to incentives and consider costs and benefits of their possible choices in order to maximize their utility or profit, they engage in the economic way of thinking As the benefits of making a particular choice increase, you are more likely to make the choice As the costs of making the choice increase, you are less likely to make the choice Copyright © 2013 John Wiley 11 Ceteris paribus assumption Ceteris paribus means “all other things remaining constant or all else equal.” e.g If the correct amount of fertilizer is added to a crop and at the same time there is a heat wave and drought, the crop yield may actually fall Thinking the fertilizer is not effective is a violation of ceteris paribus assumption Copyright © 2013 John Wiley 12 Decisions Are Made “At the Margin” Copyright © 2013 John Wiley 13 Law of Diminishing Marginal Benefits Ø The Law of Diminishing Marginal Benefits: Ceteris paribus, as more and more of an activity is done, the marginal benefits derived from the activity tend to diminish Copyright © 2013 John Wiley 14 Law of Diminishing Marginal Benefits Copyright © 2013 John Wiley 15 Law of increasing Marginal costs Ø The Law of Increasing Marginal Costs: Ceteris paribus, as more and more of an activity is done, the marginal costs of the activity tend to increase Copyright © 2013 John Wiley 16 Law of increasing Marginal costs Copyright © 2013 John Wiley 17 Marginal decision rule Ø The Marginal Decision Rule states that you can maximize the net benefit you receive from an activity when you engage in that activity until the marginal benefits are equal to the marginal costs MB = MC Ø The Net benefit of an activity is equal to its total benefit minus its total cost Copyright © 2013 John Wiley 18 Marginal decision rule Ø The Marginal Decision Rule: MB = MC Copyright © 2013 John Wiley 19 Sunk cost Ø Ø A Sunk Cost is a cost that, once incurred, cannot be recovered Sunk costs are irrelevant when making decisions at the margin Copyright © 2013 John Wiley 20 Questions/Discussions Discuss the costs and benefits of each of the following activities; include at least one nonmonetary cost and benefit in your discussion of each: a Studying for an exam b Going skiing on a class day c Taking a job d Watching television Copyright © 2013 John Wiley 21 Key Concepts • Economics • Macroeconomics • Microeconomics • Basic economic resources • Scarcity • Cost • Benefit • Utility • Profit ã Opportunity cost Copyright â 2013 John Wiley ã 22 ... individuals and firms use to make choices Copyright © 2 013 John Wiley & Sons, Inc Definition of economics Ø Economics is the study of choices Economics is a tool or way of looking at the world q Economics... Economics help us to understand all kinds of choices q Copyright © 2 013 John Wiley Microeconomics and Macroeconomics Ø Ø Macroeconomics deals with choices that societies make Microeconomics deals... 2 013 John Wiley Three basic economic resources Ø Ø Ø Labor – laborers combine time and energy to produce goods or services Land – including natural resources, water, and clean air Capital - long-lasting