This document introduces basic economic concepts. It discusses that economics is the study of how resources are used for decisions around buying, selling, etc. It also defines microeconomics as the study of individual units and macroeconomics as looking at whole markets or the economy. The main driving force in economics is scarcity, as resources are limited so their use must be managed. Due to scarcity and limited resources, individuals and societies must make choices about what, how, and for whom to produce goods and services. These choices can have significant impacts. The document then discusses opportunity costs and cost-benefit analysis as tools used to help make production decisions.
2. CONTROLLING CONCEPTS AND REALITIES
ο’ Wants v. needs β which is which
and how to choose?
ο’ Economics β study of how
resources are used, decisions,
buying, selling, etc.
ο’ Micro v. macro β which is
which?
ο’ Scarcity of resources β the
driving force behind all of it.
Because no resources are
limitless, their use must be
decided upon and managed
3. SCARCITY, CHOICE AND OPPORTUNITY COST
ο’ Wants & needs + limited resources =
scarcity
ο’ ο individuals and societies must choose
between options to decide:
ο What to produce β e.g. consumer goods or
heavy industry and/or military
ο How to produce it β higher tech production
v. increased pollution and/or job loss
ο For whom to produce it β by price system or
central control or combination of both
ο’ All societies make these choices, and the
decision can have far-reaching and
profound effects
ο U.S. vs. U.S.S.R. during the Cold War
ο Wealth produced by capitalism β making
profits on consumer goods makes the pie
bigger
4. THE U.S. OUTSPENDS THE U.S.S.R. ON MILITARY
BUDGET BY PRODUCING MORE CONSUMER GOODS
Soviet GDP
U.S. GDP
5. MAKING DECISIONS β FORCE BY SCARCITY
ο’ Opportunity cost -
picking one thing over
another [since you canβt
do both]
ο What trade-offs have you
had to make?
ο Opportunity cost is not
measured in $$ - but in
what is given up in order
to do it. E.g. if I have
resources to make 5 pies
OR 8 cakes, the
opportunity cost of
making 5 pies = 8 cakes.
6. HOW TO CHOOSE β COST V. REVENUE
ο’ Some study will need to be
done to find out if making
this thing, and how many to
make is worthwhile β i.e.
will it make enough money
to be worth it
ο’ Key study is a Cost-Benefit
Analysis
ο The study looks at money
going out [cost] v. money
coming in [revenue] to answer
the question
ο Both costs and revenues come
in several types and must be
understood if I want to avoid
losing money
7. CB ANALYSIS β PART ONE, COSTS
ο’ Types of costs [ money/resources
spent to produce]
ο Fixed β
ο’ Stay the same regardless of # of units
produced
ο’ what examples can you think of?
ο Variable β
ο’ Costs vary with # of units produced
ο’ examples?
ο Total cost β add the first two
ο Marginal cost β
ο’ The cost for producing one additional
unit
ο’ Very helpful in determining whether or
not to make more
8. CB ANALYSIS β PART TWO, REVENUES
ο’ Revenue = money coming
in. Two categories:
ο Total revenue = # units sold
X avg. price per unit
ο Marginal revenue β how
will total revenue change by
sale of one more unit? The
amount often changes as #
of items produced increases
ο’ Benefit β action taken
anticipating satisfaction
ο Marginal benefit β
additional satisfaction from
one more produced
9. COST β BENEFIT ANALYSIS β SHOULD I MAKE
MORE?
ο’ CB analysis β comparing marginal cost
with marginal benefit
ο If marginal cost > marginal benefit, then donβt
do it [unless you actually enjoy losing money]
ο Often the benefits will decrease as more is
produced β this is called diminishing marginal
benefit