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Fundamental Economic Concepts. By: Ruth Hicks. This will be super boring. …But eventually gets more interesting. economics. The study of scarcity. Resources are limited , while human wants are unlimited .

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this will be super boring
This will be super boring.

…But eventually gets more interesting

economics
economics
  • The study of scarcity.
  • Resources are limited, while human wants are unlimited.
  • Every society wants to figure out how to allocate its resources for maximum benefit.
  • This is the basic problem of economics – resource allocation.
basic assumptions of economics
Basic Assumptions of Economics

1. Scarcity

2. Trade-offs

3. Opportunity Cost

4. Rationality

5. Gains From Trade

scarcity
Scarcity
  • Society seemingly has unlimited wants and needs in a world of limited resources
  • Society lacks sufficient productive resources to fulfill all human wants and needs.
  • Implies that not all of society's goals can be pursued at the same time
trade offs
Trade-Offs
  • When we sacrifice one thing to obtain another.
  • EX:
  • Only have enough cash to buy a bike or a snowboard, but not both?  That's a trade-off.  
  • Trying to decide whether to take the Fourth of July off to spend with your family, or to go to work and make extra overtime?  That's a trade-off.
opportunity cost
Opportunity cost
  • Whenever you make a trade-off, the thing that you donot choose is your opportunity cost.
  • EX:
  • You bought that bike? Then the snowboard was your opportunity cost.
  • Decided to work on the Fourth of July? Your opportunity cost was a relaxing day hanging out with the fam at the BBQ.
  • Everything has opportunity costs.  If you just bought something, you could have always chosen to buy something else instead.  If you just chose to spend your time in a particular way, you could have always done something else.  "Something else" is your opportunity cost.
rationality
Rationality
  • Rational Choice Theory or “minimaxing” assumes that individuals always base their decisions off of what provides them with the greatest benefit or satisfaction and that are in their highest self-interest.
  • Most mainstream economic assumptions and theories are based on rational choice theory. 
  • Most human decisions are based on maximizing a person’s own benefits, while minimizing that which can hurt the individual.
  • Used to explain peoples social and economic behavior
gains from trade
Gains from trade
  • When one economy trades with another there are potentially many gains in economic welfare to be achieved:
  • Greater choice of products for consumers
  • Increased competition for producers
  • Other countries can supply certain products more efficiently
  • Trade speeds up the pace of technological progress and innovation
  • Political benefits from expansion of global trade
specialization
Specialization
  • A country’s decision to specialize in the production of a certain good or list of goods because of the advantages it possesses in their production.

“DO WHAT YOU DO BEST AND TRADE FOR THE REST!”

Two different types of advantages in trade:

Comparative

Absolute

comparative advantage
Comparative advantage
  • A country’s ability to produce a particular good with a lower opportunity cost than another country.

Absolute advantage

Acountry’s ability to produce a certain good more efficiently than another country.

EX:

Two guys are in a field of strawberries and apple trees, all the fruit must be picked. One man is 7ft. tall, the other is 4ft. tall, which man should pick apples?

THE TALL ONE!

…Same goes for countries!

in simpler terms
IN SIMPLER TERMS

COMPARATIVE ADVANTAGE IN FRY COOKING

ABSOLUTE ADVANTAGE IN BOTH

You

Your Neighbor

  • Decent Fry cook
  • Awful Heart surgeon
  • Excellent Fry cook
  • Excellent Heart surgeon
micro v macro
Micro v. macro
  • Microeconomicsis the study of individuals and business decisions. Looks at the choices that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy.More detailed
  • Macroeconomics looks at higher up country and government decisions. behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.Bigger picture