Lecture Introduction to economics: Social issues and economic thinking: Chapter 1 - Wendy A. Stock

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

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Z Pan

Chapter 1

An Introduction to the Economic Way of Thinking

Ø Define economics

Ø Explain how scarce resources

influence choices

Ø Describe the influence of

benefits and costs on deciding

among alternatives

Ø Identify the decision rules

individuals and firms use to

Copyright © 2013 John Wiley & Sons, Inc.

After studying this chapter, you should be

able to:

Ø Economics is the study of choices.

q Economics is a tool or way of looking at the world

q Economics help us to understand all kinds of choices

Definition of economics

Ø Macroeconomics deals with choices that

societies make

Ø Microeconomics deals with the choices

individuals, households, and businesses make.Microeconomics and Macroeconomics

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

Why Study Economics?

Ø Scarcity occurs when we have fewer resources than we have uses for those resources.

Ø Scarcity implies choices

Scarcity

Ø Labor – laborers combine time and energy to produce goods or services

Ø Land – including natural resources, water, and clean air

Ø Capital - long-lasting tools or skills used in

producing goods and services

Three basic economic resources

Decision makers make choices by comparing

benefits and costs

Ø Benefit of a choice is what you gain when you make the choice

Ø Cost of a choice is what you give up to make the choice

Ø Utility - the satisfaction or happiness individuals get from their choices

Ø Profit - the difference between the earnings and the costs of production

How choices are made?

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?

Opportunity cost

Opportunity cost of college

Private Public

Tuition &

Annual Total $56,000 $36,600 Four Years Total $224,000 $146,400

“Incentives Matter”

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.

Ø As the benefits of making a particular choice

increase, you are more likely to make the choice

Ø As the costs of making the choice increase, you are

less likely to make the choice.

economic way of thinking

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

Ceteris paribus assumption

Decisions Are Made “At the Margin”

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

Law of Diminishing Marginal Benefits

Law of Diminishing Marginal Benefits

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

Law of increasing Marginal costs

Law of increasing Marginal costs

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.

Marginal decision rule

Ø The Marginal Decision Rule: MB = MC

Marginal decision rule

Ø A Sunk Cost is a cost that, once incurred,

cannot be recovered

Ø Sunk costs are irrelevant when making

decisions at the margin

Sunk cost

a Studying for an exam

b Going skiing on a class day

c Taking a job

d Watching television

• Law of diminishing marginal benefits

• Law of increasing marginal cost

• Net benefit

• Marginal decision rule

Copyright © 2013 John Wiley

& Sons, Inc.

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Key Concepts