CHAPTER 1: Economics
What is Economics?
the study of how the material needs and wans of a society are satisfied.
Must satisfy 3 basic questions:
1. What is produced?
2. How is it produced?
3. Who consumes the goods and services produced?
a. But also who makes the decisions? Differences in economics, consensus?
b. Market based economy make these decisions by INIDIVIDUALS.
Scarcity, Choice and Opportunity Cost:
The fundamental economic problem stems from 2 basic facts and their implications.
1. Society has virtually limitless needs and wants in terms of goods and services
a. Distinction is not very clear or very important.
2. Limited resources with which to satisfy these materials needs and wants.
a. Natural resources
b. Human resources (productivity)
c. Physical capital
Everyone can’t have everything the need/want
If we choose one thing, we give up something else
Opportunity cost – next best – forgone alternative
Probably the most important concept in economics.
Examples: buy the latest iGadget… opportunity cost – next best thing you could
do with the $500.00. Ski trip? Savings? CHAPTER 1: Economics
Watching “Game of Thrones”… opportunity cost – next best thing you could do
with one hour. Watching sports? Socializing? Exercising? Studying?
You always put opportunity cost into account when making a decision
Decision Making at the Margin
Many, if not most times we make’s decisions at the margin.
Deciding whether to purchase one more or one less of a good or services.
Consumption Possibility Example
A student has $16 to go out on a Friday night. Price: $4 per pint of beer and $2 per
slice of pizza. If the student spends all their money then combinations of beer and pizza
4 x B + 2 x P = 16$
This is referred to as the consumption possibility boundary (CPB), or the budget
constraint or the budget line.
Rewrite in the form: Y = b +mx
M = slope
Y = beer in pints
X = slices of pizza
4B + 2P = 16
B = 16 – 2P
4 4 4
b = 4 – 1/2p
If p increases, then B decreases.
Opportunity cost of pizza Is ½ pint of Beer.
Scarcit – combinations outside the CPD are unattainable CHAPTER 1: Economics
Choice – there are many available combinations, only one can be chosen
Opportunity Cost – If the student wants more beer then must give up slices of
Opp cost of pizza?
I give up a ½ pint of beer
▯these two numbers are reciprocal #’s always!
Opp cost of beer?
I give up 2 slices of pizza.
4B + 2P = 16
= 16 – 4B
2 2 2
P= 8 – 2P
So when P decreases, B will increase.
Production Possibilities Boundary/Frontier/Curve (PPB)
The PPB is a graph that shows the various combinations of output that the