2. Scarcity
• Productive resources are limited
• People cannot obtain all that they want--
they must make a sacrifice (or in more
economic terms ―Pay a cost‖)
• Scarcity forces us to choose among
alternatives
3. Choices
• Choosing among alternatives creates an
opportunity cost
• Opportunity Cost is the value of the
―next-best‖ choice
• Higher or lower opportunity costs can
cause people to change choices
• Example-An early Prom proposal
• Example-Zebras and lions do it too
4. Marginal Analysis
• How do we make individual choices?
• Rationality: Individuals maximize in making their
choices—they want the most benefit with the
least cost
• Maximization implies that individuals use
marginal analysis
• Marginal Analysis is the comparison of marginal
benefits to marginal cost
--MB>MC, then add more
--MB<MC, then subtract some
5. Marginal Benefit Vs. Marginal Cost
• ―Marginal‖ in economics means
―additional‖ or ―extra‖
• Marginal benefit is the added or extra
benefit associated with a decision
• Marginal cost is the added or extra cost
associated with a decision
6. Who Wants to be an
“Econ” Millionaire?
Why do movie and rock stars seldom get
college degrees?
(a) They are not smart enough to get into
college.
(b) They get tired of crowded classes and
homework.
(c) They can’t pay the tuition.
(d) Their time is too valuable to sit in a
classroom.
7. More MB vs. MC
• You and your fiance are shopping for
engagement rings.
• Do you buy a ¼, ½, ¾, or 1 carat ring?
• Your decision is probably based largely on what
you consider the benefit of an engagement ring.
• The marginal cost is the added cost associated
with a larger diamond.
• The marginal benefit is the satisfaction or ―utility‖
associated with a larger diamond.
8. Think Some More
• Why do farmers often wait until a rainy day to do
errands in town, while a man in a new suit will
decide to forego his errands on the same day?
• Why would a highly talented person who travels
a lot hire a chauffeur?
• Why would a businessman buy full-fare airline
tickets while people planning vacations fly when
rates are the lowest?
9. When do we use marginal analysis?
• Individuals—when we make choices about
our lives—provides a precise, systematic
analysis
• Business/firms– enables business
managers and executives to increase
profit
• Consumers and workers—make better
buying and employment decisions
10. Social vs. personal
• Although it will help us make decisions,
economics primary objective is to
examine problems and decisions from the
social, rather than the personal, point of
view.
• It looks at what is in society’s best interest,
not strictly from the standpoint of one’s
own pocketbook.
11. Economics Use
• Positive economics—focuses on facts and
cause-and-effect relationships (what is)
• Normative economics—incorporates
values judgments about what the economy
should be like or what particular policy
actions should be recommended to
achieve a desirable goal (what ought to
be)
