Lecture1_Ch1_2_What_is_Economics_and_The_Economic_Problem

Lecture1_Ch1_2_What_is_Economics_and_The_Economic_Problem -...

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What is Economics? August 25, 2011 CHAPTER 1
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Objectives Explain the key ideas that define the economic way of thinking (Marginal Analysis): Scarcity, Opportunity Cost and Trade off Explain the big questions of economics: What should we produce in our economy? How goods and services are produced? Factors of production For Whom? Who gets the goods and services that are produced?
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Economics All the questions we will discuss in this class reflect a basic fact of life People must make choices as they try to attain their goals. Economics is the study of the efficient allocation of resources to maximize the objectives of an individual or community of individuals. Through economy, resource use is organized to satisfy the desires of people living together in a society.
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Two Basic Concepts: SCARCITY The imbalance between our desires and the means of satisfying those desires . Our inability to satisfy all our wants is called scarcity Scarcity requires choices and all choices entail a cost. Each time we make choice we also forgo an opportunity. OPPORTUNITY COST OPPORTUNITY COST The highest valued alternative that we give up to get something is the opportunity cost of the activity chosen. There is no such thing as a free lunch: every choice involves an opportunity costs For example: What is the opportunity cost of attending college?
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Economic Decisions In any economy, decisions must be made to determine: 1. WHAT will be produced? Choices must be made about which goods and services to make available and which to forgo (since we have limited resources). 2. HOW will goods and services be produced? More than one way to accomplish any given objective (labor -capital substitution). 3. TO WHOM will goods and services be distributed? Are they going to be distributed equally to everyone so that each of us have same goods, lives in same type of house, wears the same clothes? OR are goods to be sold to those willing and able to pay?
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The Economic Way of Reasoning: Marginal Analysis Optimal decisions are made at the margin. In economics, “marginal” means “extra.” The marginal analysis: It is possible for you to gain from engaging in more of an activity if the extra benefits exceed the extra costs of doing so. MARGINAL BENEFIT: The value placed on an extra (one more) unit of an item. MARGINAL COST: The value of the sacrifice made to obtain an additional unit of an item.
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The Economic Way of Reasoning: Marginal Analysis Making an economic decision is a question of comparing costs and benefits of an alternative that is available to us.
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Lecture1_Ch1_2_What_is_Economics_and_The_Economic_Problem -...

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