Transcript Document
UNIT 1 – Chapter 1 ‘First Principles’ Definition of Economics Scarcity – resources vs wants Opportunity cost Marginal Analysis Efficiency WHAT IS ECONOMICS ALL ABOUT? Economics is the study of finding the best use of available (limited) resources to satisfy unlimited, sometimes conflicting needs and wants. Key Terms Scarcity Unlimited wants Limited Economic Resources: Land, Labor, Capital, Entrepreneurship EXAMPLE OF SCARCITY If money were no object, list 3 things that you would purchase, big or small. EXAMPLE OF SCARCITY Now consider your income level. How many of these items can you now purchase? What modifications might you make to your list to gain similar items? EXAMPLE OF SCARCITY This exercise illustrates the choices we must make due to scarcity. These choices are faced every day on a personal level (household), by businesses, and especially by the government. OPPORTUNITY COST When we make our choices of how to utilize our limited resources, we not only need to look at the direct cost of our resource, but also at the indirect cost of what we are giving up. This indirect cost is our opportunity cost. OPPORTUNITY COST Opportunity Costs: The indirect cost of the activity you have chosen, measured by the benefit foregone of the next-best alternative to the activity you have chosen. OPPORTUNITY COST EXAMPLE What is the true cost of attending college fulltime? What are the direct costs? What are the indirect costs? A MATTER OF DEGREES: IS COLLEGE WORTH THE COST? Teachers and parents constantly encourage able students to attend college. Yet Microsoft cofounder Bill Gates and talk show host Oprah Winfrey both dropped out of college and baseball star Alex Rodriquez never even bothered to enroll. Is it wrong to emphasize college, or did Gates, Winfrey and Rodriquez simply make good choices? MAKING DECISIONS ON THE MARGIN Choices commonly incrementally. made “on the margin,” Marginal Cost: The expected incremental cost incurred from the consumption of one more item. Marginal Benefit: The expected incremental benefit gained from the consumption of one more item. or MAKING DECISIONS ON THE MARGIN Economic theory predicts that you will make choices or decisions where the additional benefit you gain from the decision (Marginal Benefit) is greater than the additional cost of the decision (Marginal Cost). Marginal Benefit > Marginal Cost MAKING DECISIONS ON THE MARGIN Example: Overuse of Antibiotics There has been much publicity over the past several years concerning the overuse of antibiotics. Patients are requesting and doctors are prescribing antibiotics for many viral illnesses that are not cured through the use of antibiotics. As a result, germs are gaining strength and resistance to the current medications. This is a cause for concern that we may not have effective medication for the future treatments of bacterial infections. How can we explain this situation using economics?? EFFICIENCY Efficiency occurs when the economy is getting the most out of its available resources. There is no way in which resources can be reallocated to increase the production of one good without the decrease in production of another.