Notes1 - Ch 1 Notes Economics the study of how individuals and societies choose to use scarce resources that nature and previous generations have

Ch 1 Notes • Economics - the study of how individuals and societies choose to use scarce resources that nature and previous generations have provided. • Economics is the study of how people make choices, which when added up translates to societal choices • Economics - How society uses scarce resources to produce valuable commodities and distribute among people WHY STUDY ECONOMICS ? TO LEARN A WAY OF THINKING • The study of economics teaches us a way of thinking and helps us make decisions • Economics has three fundamental concepts: • OPPORTUNITY COST • Opportunity cost- the best alternative that we forgo, or give up, when we make a decision. • Opportunity costs arise b/c resources are scarce (scarce=limited) • MARGINALISM • Marginalism- the process of analyzing the additional or incremental costs or benefits arising from a choice or decision • You live in New Orleans and wants to visit Mom in Iowa and business requires you to go to Kansas City, so the cost of visiting Mom would be only the additional/marginal time and money cost of getting to Iowa from Kansas City • To produce a CD music labels spend $300,000 for recording music, developing materials, and distributing the album. • To produce another copy costs about $2. Every new copy costs only $2 so as long as EMI can sell that copy for more than $2 it is better off making the copy • Marginal cost- incremental cost of producing one more unit of a good i.e. $2 • Sunk costs- costs that cannot be avoided b.c they have already been incurred. I.e. original investment $300,000 • Marginal cost helpful- for airlines about to fly off with empty seats the marginal cost of an extra passenger is zero (the total cost of the trip is roughly unchanged by the addition of an extra passenger) thus setting aside a few seats to be sold at discount can