Unit I: Basic Economic Concepts

1. Unit I: Basic Economic Concepts Topic A: The economic perspective: limits, alternatives, choices and trade-offs

2. What is economics? Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

3. What is scarcity? Relationship between limited resources and seemingly unlimited wants. Fundamental problem of all economies.

4. The Scope of Economics • Microeconomics is the branch of economics that examines the behavior of individual decision-making units—that is, business firms and households.

5. The Scope of Economics • Macroeconomics is the branch of economics that examines the behavior of economicaggregates— income, output, employment, and so on—on a national scale.

6. The Scope of Economics

7. Marginalism • In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.

8. Marginalism • For example, when a firm decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost. • Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

9. Scarcity, Choice, and Opportunity Cost • Human wants are unlimited, but resources are not. • Three basic questions must be answered in order to understand an economic system: • What gets produced? • How is it produced? • Who gets what is produced?

10. Scarcity, Choice, and Opportunity Cost • Every society has some system or mechanism that transforms that society’s scarce resources into useful goods and services.

11. Scarcity, Choice, and Opportunity Cost • Capital refers to the things that are themselves produced and then used to produce other goods and services. • The basic resources that are available to a society are factors of production: • Land • Labor • Capital

12. Scarcity, Choice, and Opportunity Cost • Production is the process that transforms scarce resources into useful goods and services. • Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputs of the process of production.

13. Scarcity and Choicein a One-Person Economy • Nearly all the basic decisions that characterize complex economies must also be made in a single-person economy. • Constrained choice and scarcity are the basic concepts that apply to every society.

14. Scarcity and Choicein a One-Person Economy • Opportunity cost is that which we give up or forgo, when we make a decision or a choice.

15. Scarcity and Choicein an Economy of Two or More • A producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources.

16. Scarcity and Choicein an Economy of Two or More • A producer has a comparative advantage in the production of a good or service over another if it can produce that product at a lower opportunity cost.