1. Unit 1
What is Economics?
• The Basics

2. Economics
• The study of the use of scarce resources that have
alternative uses
Scarce resources –
• Natural Resources (land, water, oil, etc.)
• Human Resources (workers, entrepreneurs, etc.)
• Capital Resources (money, machinery, etc.)
Alternative uses –
• Wood (paper, furniture, houses, etc.)
• Steel (automobiles, desks, etc.)
• Money (buying more inventory, hiring more workers,
how much to advertise, etc.)

3. Branches of Economics
Micro=individual
or Little Picture
Macro=Whole or
Big Picture

4. Positive vs. Normative Economics
•
Positive And Normative Economics - Video |
Investopedia
Positive vs Normative Economics

5. 7 Principles That
Guide an Economic
Way of Thinking

6. Principle #1:
Scarcity Forces Tradeoffs
• Scarcity – not enough resources to do
everything we would want to do
• Those resources have alternative uses
• When you choose to use a given resource for
something, you are unable to use that
resource for anything else
• Whenever you choose one thing over
another, you are making a tradeoff
Scarcity

7. TANSTAAFL
• “There Ain’t No Such Thing As A Free
Lunch”
• Every choice someone makes involves
tradeoffs, whether they realize it or not
• Example: you get a free lunch
– Lunch might be free to you.
– Someone, however, had to pay for that lunch.
– That someone had to give up something (payment
for lunch, eating that lunch him/herself, etc.) in
order for you to get it for free.

8. Opportunity Cost
• The “value” of the next most likely choice for the use of a
resource that is given up when making a choice
• Example:
• Imagine you have $5.00. You could do the following with it
(in this prioritized order):
• Spend it on a snack at Sheetz/Handy Mart
• Spend it on a snack at a fast food restaurant
(McDonald’s, Arby’s, KFC, Taco Bell, etc.) on their Value
Menu
• Spend it on admission to the next home sporting event
• Save it to buy gas later in the week
By choosing to spend it on a snack at Sheetz/Handy Mart, the
opportunity cost is not being able to spend it at one of the
fast food restaurants (the second most likely choice).
Opportunity Cost

9. Principle #2:
Costs Versus Benefits
• The scarcity-forces-tradeoffs principle forces
us to make choices
• Economists assume that individuals make
choices based on expected costs and benefits
– Costs: what you spend in time, money, or other
sacrifices to get your choice
– Benefits: what you gain from something in terms
of money, time, experience, or other
improvements in your situation
• People choose something when the benefits
of doing so are greater than the costs

10. Cost-Benefit Analysis
Example #1: You have $20 and are considering spending it on gas
for your car.
Costs:
• Won’t have money to go out on a date this weekend or other
entertainment
Benefits:
• Go where you want to go & Won’t have to get a ride from
parents

11. Example #2: Start my own
business.
Costs:
Come up with start up funding and
may to take out a loan
Lots of time and energy & not
guranteed to make $$ & High risk
Benefits:
Will be own boss & Make all of
the decisions
Pride of ownership & It’s your
passion & You reap the $$
rewards

12. Video & Assignment
Decision Making:
Scarcity, Opportunity Cost, & You
And Video
http://www.learner.org/series/econusa
/video/?pid=2466&uid=14&unit=Resou
rces%20and%20Scarcity

13. Principle #3:
Thinking at the Margin
• Thinking at margin is deciding to add (or
subtract) one more unit to (or from) what we
already have
• Examples

14. • Compare marginal costs and marginal benefits
Example #1: Getting another pair of shoes
• Marginal Costs:
• Having as much money to put gas in car
• May not be able to have money to go out on a date
• If saving for a goal, may not be able to put as much
toward that goal
Marginal Benefits:
• Shoes may be more comfortable than other pairs you
have
• Provides more flexibility in putting together outfits to
wear
• May be more fashionable (status symbol)

15. Diminishing Marginal Utility
• Marginal Utility
– The extra satisfaction or benefit you will get from
an increase of an additional unit of a good or
service
– Essentially your perceived difference between the
marginal benefit and marginal cost from that
additional unit

16. • Law of Diminishing Marginal Utility
– “You can have too much of a good thing”

17. In-Class Activity
Marginal Analysis

18. Production Table
Number of
Workers
1
2
3
4
5
6
7
Total Output
Marginal Output of
Additional Worker

19. How Clean is Clean Enough?
Statement 1: Local Lake is a disaster. It was once a
beautiful, clean area where you could drink the
water safely. Now it is dirty from overuse, soil
runoff, and overflow from septic tanks. The
County Council should clean the lake completely:
100% clean. The technology and know-how are
available. There is no excuse for not doing the job
completely.
Statement 2: We can clean up most of the pollution
in the lake for 1/3 of what it would cost to clean it
completely. It may be too costly to clean the lake
completely. Resources are scarce. If the County
Council overspends for the environment, it can
accomplish less in other areas that are
important, too.

20. Principle #4:
Incentives Matter
• Incentive – something that motivates a person
to take a particular course or action
• People respond to incentives in generally
predictable ways
• Incentives can be both positive
(rewards/benefits) and negative
(punishments/costs)
– Negative incentives sometimes called
disincentives

21. In-Class Activity
Why People Trade

22. Principle #5:
Trade Makes People Better Off
• Adam Smith quote “It is the maxim of every
prudent master of a family never to attempt
to make at home what it will cost him more to
make than to buy.”
Retrieved from http://app.discoveryeducation.com/search?Ntt=adam+smith on
January 30, 2014.

23. Principle #6:
Markets Coordinate Trade
• Market – any arrangement that brings
together buyers & sellers to do business with
each other

24. • When markets operate freely or with limited
government interference, buyers & sellers can
trade with each other until both are satisfied
with their sales & purchases
– Result is efficient market that serves everyone’s
interests without guidance from a person or
institution
• Markets usually do better than anyone or
anything else at coordinating exchanges
between buyers & sellers
• Free Market Economy

25. Principle #7:
Future Consequences Count
• Decisions made today have consequences not
only for today but also for the future
– Many only look at immediate costs & benefits
– Must also consider long-term effects
• Law of Unintended Consequences
– Actions of people and governments always have
effects that are not expected
– Economists spend much of their time trying to
predict these unintended consequences

26. Example:
A few years back, the Winchester City Council passed an
increase in the tax per pack on cigarettes, claiming it would
raise $X amount of revenue (based on current cigarette sales
volume). After a year or so, the amount of tax revenue from
cigarette sales by the city did go up, but not nearly as much
as was estimated when the tax was proposed. What actually
was happening was that people were going to buy their
cigarettes in the county. Although the amount of tax
collected did go up because more was being collected per
pack of cigarettes sold, less cigarettes were being sold in the
city. This hurt those business owners selling cigarettes
because this drove sales away from them, and they made
less money from cigarette sales (less overall revenue to pay
rent, pay/hire workers, profit, etc.). Those arguing against
raising the prepared meal (i.e. restaurant) tax are arguing
that this raise would have a similar effect on those small
businesses serving food.