INTRODUCTION TO

ECONOMICS
Choices, Choices, Choices, . . .
 WHAT IS ECONOMICS?

Economics – the study of how

individuals and societies make
decisions about ways to use
scarce resources to fulfill wants
and needs.
 THE STUDY OF ECONOMICS

• Macroeconomics
• The big picture: growth,
employment, etc.
• Choices made by large
groups (like countries)

• Microeconomics
• How do individuals
make economic
decisions
 ECONOMICS: 5 ECONOMIC
QUESTIONS
Society (we) must figure out

• WHAT to produce (make)

• HOW MUCH to produce (quantity)
• HOW to Produce it (manufacture)
• FOR WHOM to Produce (who gets what)
• WHO gets to make these decisions?
USEFULNESS OF ECONOMICS - ECONOMICS PROVIDES
AN OBJECTIVE MODE OF ANALYSIS, WITH RIGOROUS
MODELS THAT ARE PREDICTIVE OF HUMAN BEHAVIOR

a.Scientific approach

b.Rational choice
 WHAT ARE RESOURCES?
• Definition: The things used to make other
goods
 BUT, THERE’S A
FUNDAMENTAL PROBLEM:

SCARCITY: unlimited wants and

needs but limited resources
CHOICES, CHOICES

Because ALL resources, goods,

and services are limited – WE
MUST MAKE CHOICES!!!!
 WHY CHOICES?

We make choices about how we spend our money, time, and

energy so we can fulfill our NEEDS and WANTS.

What are NEEDS and WANTS?

 WANTS AND NEEDS,
NEEDS AND WANTS
• NEEDS – “stuff” we must have to survive,
generally: food, shelter, clothing

• WANTS – “stuff” we would really like to have

(Fancy food, shelter, clothing, big screen TVs,
jewelry, conveniences . . . Also known as LUXURIES
VS.
 TRADE-OFFS

You can’t have it all (SCARCITY –

remember) so you have to choose
how to spend your money, time, and
energy. These decisions involve
picking one thing over all the other
possibilities – a TRADE-OFF
 TRADE-OFFS, CONT.
• What COULD you have done instead of
come to college today?
 The result of your Trade-Off is the

OPPORTUNITY COST =

The Value of the Next Best Cho

ice

(Ex: Sleeping is the opportunity cost of studying for

a test)
 “There is no such thing as a free lunch.”
Imagine that the friendly neighborhood pizza
restaurant set up a table full of pizza boxes
outside your school about lunchtime and put
up a sign that said Pizza and soda $0.00.
Why wouldn’t that be a free lunch? It didn’t
cost you anything right? Well, it may not
have cost you in terms of money, but any
situation which forces you to make a choice
results in an opportunity cost.

Or consider this: you may spend several hours this evening

tweeting and texting friends at no additional monetary cost to your
phone plan. You may think of this as free, but there is a cost. What
opportunity did you give up? In his famous quote, Milton Friedman
was reminding us of the lessons we have learned today: because of
scarcity we must choose and choice means that there is an
opportunity cost
 OPPORTUNITY COSTS

• This is really IMPORTANT – when you choose

to do ONE thing, its value (how much it is
worth) is measured by the value of the
NEXT BEST CHOICE.
• This can be in time, energy, or even
MONEY
Then I
If I buy a can’t afford
pizza… the
movies…

Q: What is the opportunity cost of buying pizza?

WRA
P UP
 WHAT IS ECONOMICS?

Economics – the study of how individuals

and societies make decisions about ways
to use scarce resources to fulfill wants
and needs
 WHAT IS MACROECONOMICS?

• Macroeconomics
• The big picture: growth, employment,
etc.
• Choices made by large groups (like
countries)
 WHAT IS
MICROECONOMICS?
How individuals make economic
decisions
 WHAT IS THE DIFFERENCE
BETWEEN A NEED AND A
WANT?
• Needs: items for survival, water, food,
shelter
• Wants: luxuries, fancy cars, vacations
 WHAT ARE
RESOURCES?
Things used to make other goods.

What is Scarcity:

unlimited wants and needs

but limited resources
WHAT IS OPPORTUNITY
COST?
The costs of the choice NOT taken when
you choose to do ONE thing, its value
(how much it is worth) is measured by
the value of the NEXT BEST CHOICE. This
can be in time, energy, or even MONEY
 What are the 5 Economic Questions
Society (we) must figure out

WHAT to produce (make)

HOW MUCH to produce (quantity)
HOW to Produce it (manufacture)
FOR WHOM to Produce (who gets what)
WHO gets to make these decisions?
 N o w
Do

WHER
E DID
THIS
COME
FROM?
 PRODUCTION

• So how do we get
all this “stuff” that
we have to decide
about?
Decisions, decisions
…
 PRODUCTION, CONT.
• Production is
how much • STUFF – Goods and Services.
stuff an
individual, • Goods – tangible (you can
business, touch it) products we can
country, even buy
the WORLD
makes. • Services – work that is
performed for others
• Capital Goods – goods used
to provide services or to
make money
 CAPITAL GOODS AND
CONSUMER GOODS
• Capital Goods: are
used to make other
goods

• Consumer Goods:
final products that are
purchased directly by
the consumer
 FACTORS OF PRODUCTION

• So, what do we need to make all of this

Stuff?
 4 FACTORS OF PRODUCTION
• LAND – Natural Resources
• Water, natural gas, oil, trees (all the stuff we find on,
in, and under the land)
• LABOR – Physical and Intellectual
• Labor is manpower

• CAPITAL - Tools, Machinery, Factories

• The things we use to make things
• Human capital is brainpower, ideas, innovation

• ENTREPRENEURSHIP – Investment $$$

• Investing time, natural resources, labor and capital
are all risks associated with production
WHICH FACTOR OF
PRODUCTION?
WHICH FACTOR OF
PRODUCTION?
WHICH FACTOR OF
PRODUCTION?
WHICH FACTOR OF
PRODUCTION?
 THREE PARTS TO THE
PRODUCTION PROCESS
• Factors of Production – what we need to
make goods and services

• Producer – company that makes goods

and/or delivers services

• Consumer – people who buy goods and

services (formerly known as “stuff”)

Which Came First?

 PRODUCTION PROCESS

Land

Goods

Labor
Production/Manufacturing
“Factory” Consumers

Capital

Services
Entrepreneurship
 CHANGES IN PRODUCTION

• Specialization –
dividing up
production so that
Goods are produced
efficiently
KFC makes
hamburgers, not
shoes!!

Nike makes shoes, not

hamburgers
 CHANGES IN PRODUCTION

• Division of Labor –
different people
perform different
jobs to achieve
greater efficiency
(assembly line).
You do your job,
and I will do my
Job and we will be
more EFFICIENT
 CHANGES IN PRODUCTION
• Consumption – how
much we buy
(Consumer
Sovereignty)
The DELL store is
empty because….

Everyone is at the
APPLE STORE!!!
 CHANGES IN PRODUCTION

• If we INCREASE land, labor, capital we

INCREASE production
• Many entrepreneurs invest profit back into
production

• If we DECREASE land, labor, capital we

DECREASE production

• BUT WHY would we ever DECREASE

production?
 THE CIRCULAR FLOW MODEL
• Economic model illustrating the flow of goods
and services though the economy.
• In the model, producers are termed as "firms"
while consumers are referred to as
"households."
• Firms supply goods and services
Households consume these goods and
services.
• Factors of production (land, labor, capital) are
supplied by the household to firms and the
firms convert these into finished products for
household consumption
Wrap
Up
PART 2: COSTS AND REVENUES
 COSTS AND REVENUES

Cost – the total amount of money it takes to

produce an item (to pay for ALL Factors of
Production).
 COSTS AND REVENUES

Revenues – the total amount of $ a

company or the government takes in.
 COSTS AND REVENUES

Fixed Costs – the amount of money a business

MUST pay each month or year (like rent and
Capital expenses).
 COSTS AND REVENUES

Variable Costs – the amount of money a business

pays that changes over time (Labor and Raw
Materials).
 COSTS AND REVENUES

Total Costs = Fixed + Variable Costs.

 COSTS AND REVENUES - CHART

Marginal Costs – the

additional Cost of the NEXT UNIT
produced.

Margin=Extra Space
 COSTS AND REVENUES

Profit – the difference

between Total Costs
and Revenues. This is
WHY you’re in
BUSINESS (Profit
Motive!)
• Profit=Revenues-Total cost

• Profit Motive=why you are

in business---to make
MONEY
• (principles of Capitalism)
 COSTS AND REVENUES

Cost Benefit Analysis –

weighing the Marginal
Costs vs. the Marginal
Benefits of producing
an item or making any Marginal
Marginal Costs
economic decision. If Benefits
the Benefit is GREATER
than the Cost, then
business does it.
 COST-BENEFIT ANALYSIS

• Immediate or short term satisfaction can

lead to missing the long-term
benefits.#7

For Example

• Immediate spending on cheap stuff

instead of long-term savings will lead to
lower economic prosperity.
WRA
P UP
PART 3: COMPARATIVE
ECONOMICS
 TRADITIONAL ECONOMIES

• Def: Economic
Questions answered by
custom
• Predominately
Agricultural
• Developing or “3rd
World”
• Trade and barter
oriented
• Low GDP & PCI (per
capita income = avg.
 COMMAND ECONOMIES
• Def: Economic
questions answered
by the government
• Very little economic
choice
• No private ownership
• Communism
• Old Soviet Union, old
Communist China,
Cuba and North Korea
 KARL MARX
• 19th century
German economist
• Author of
“Communist
Manifesto” and “
Das Kapital”
• Government should
control economy
and distribute goods
and services to the
people
• Founder of
revolutionary
socialism and
 COMMUNISM FALLS
• Market reforms in China in
the mid 1970s.

• Fall of the Berlin Wall in

1989.

• Collapse of the Soviet Union

1991.

• Free Market Capitalism (w/

some Mixed Economies) the
only show in town.
 FREE MARKET (CAPITALIST)
ECONOMIES
• Economic questions
answered by
producers and
consumers
• Limited government
involvement
• Private property
rights
• Wide variety of
choices and products
• U.S., Japan
 ADAM SMITH

• 18th century Scottish

economist
• Published “The Wealth
of Nations” in 1776
• Explained the workings
of the free market
within capitalist
economies
• Invisible hand of the
market
 ADAM SMITH (CONT.)

• Laissez-faire - Government stays out of

business practices “hands off” to let the
market place determine production,
consumption and distribution.

• Individual freedom and choice

emphasized.
 PRINCIPLES OF CAPITALISM

• Competition – more
businesses means
lower prices and
higher quality
products for
consumers (US!) to
buy.
 PRINCIPLES OF CAPITALISM

• Voluntary Exchange
– businesses and
consumers MUST be
free to buy or sell
what and when
they want.
 PRINCIPLES OF CAPITALISM

Private Property –
Individuals and
businesses MUST
be able to get the
benefits of owning
their OWN property.
Government
doesn’t control it.
 PRINCIPLES OF CAPITALISM

• Consumer
Sovereignty –
consumers get to
make free choices
about what to buy
and this helps drive
production
(Demand drives
Supply).
PRINCIPLES OF CAPITALISM

• Profit Motive –
people want to
make or save $$$$.
Their “Self
Interest” motivates
Capitalism.
 PRINCIPLES OF CAPITALISM

• Social Safety Net –

“Mixed Economy” idea
that says the government
should NOT allow people
to suffer in economic
crisis (natural part of
Capitalism’s “Business
Cycle”), but provide
security instead – Social
Security, Unemployment
Insurance, etc.
 MIXED ECONOMY/SOCIALISM
• Government
involvement and
ownership and control of
property, of decision
making, and companies.
• Government control of
business
• Social “safety net” for
people
• Socialism
• Common in Europe,
Latin America, and Africa
 JOHN MAYNARD KEYNES

• The Invisible Hand

doesn’t always
work.

• “The long run is a

misleading guide to
current affairs. In
the long run we are
all dead.” or . . .
the trouble is
people eat in the
short run.
 KEYNESIAN ECONOMICS
(CONT.)
• Government should intervene in economic emergencies
through tax and spending (Fiscal Policy) and changing
the money supply (Monetary Policy).
• This is done to smooth out the business cycle (expansion
and recession) and keep inflation low.
PART 4: LABOR ISSUES
 LABOR

• Wages – what companies pay • Salary – the amount of

employees for their labor pay a person gets over a
(usually based upon an year (especially for
hourly rate).
“professional” jobs).

• Blue Collar
• White Collar
• Manufacturing, work with
hands • ‘Office’ jobs
• Usually the ‘labor’ in • Usually control production
production
 WHEN PRODUCTION
DECREASES
• Downsizing – laying off employees to save costs.

• Outsourcing – sending jobs and manufacturing overseas

or contracting to outside companies to save money.

• Bankruptcy – government allows business to restructure

it’s debt, but now all profits go to paying off debt rather
than to the owners/investors.

• Out of Business – lose all your business, money, and

profits.

• The current trend in the U.S. is that manufacturing jobs

are declining
 HOW DOES ‘LABOR’ PROTECT
ITSELF?

• Labor Unions: organization of workers who have

banded together to achieve common goals
• Wage protection
• Workplace safety
• Benefits
• Job protection
 COLLECTIVE BARGAINING
AND STRIKES
• Collective
Bargaining
• Representatives of
the Union and the
company negotiate a
contract for the
workers; usually they
rely on compromise
• Strikes
• When an agreement
can’t be reached,
workers stop working
to try to force the
hand of the company
Different
types of
economic
systems
What are the three basic
questions of any
economic system?
How would you rank these goals
in importance (from 1-7))
There are four basic types of
economic system
What are the advantages and
disadvantages of a traditional
economy?
Command economy
What are the advantages and
disadvantages of a command
economy?
Market economy
What are the advantages and
disadvantages of a market
economy?
Mixed (or hybrid) economy
at are its advantages and disadvantag
 Mixed
economy