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Econ Course Overview
II.Microeconomics-The study of the economic behavior and decision-making of small units, such as individuals, families, and businesses.-(Prices of single items, markets, business decisions)
Econ Course Overview
III. Macroeconomics
-The study of the behavior and decision making of entire economies.
-(unemployment, inflation, production of a country, international trade)
Why Study Economics?
1. Literacy
2. Explanations and understanding of markets, prices, behavior
3. Improve decision-making skills
4. Improve critical thinking
5. Solve problems
EconomicsThe study of how
individuals and societies try to satisfy wants and needs by choosing how to use scarce resources.
Scarcity
• Fundamental economic problem facing all societies that results from a combination of limited resources and people’s virtually unlimited wants.
• “We can’t have everything
we want”
How do people deal with scarcity?
• Scarcity forces us to choose
• We can’t avoid making choices about resource use
True or false?The best things in life are free.
When we consider scarcity, are the best things in life really free?
Reading: Naked Econ, pp.4-9
1. Select 3 phrases and be able to explain your thoughts.
2. Write one question you have related to the reading.
3. Discuss with the person sitting next to you.
Homework
1. What are your economic concerns right now?
2. What work experiences do you have?
3. Where do you see yourself in 5 years?
4. What are your interests?
5. What do I need to know about you?
• Answer all questions, typed and double-spaced.
The Rational Actor Model
Assumptions:
1. Humans are self-interested (not selfish, but act in ways consistent with our preferences)
2. Humans are rational (can choose behavior appropriate to achieve goals)
Are we rational?
• A $20 toaster is on sale for ½ price across town. Would you go buy it?
• An oven that sells for $500 at a nearby store is on sale for $490 across town. Which would you buy?
How do “rational” people make choices?
Cost-Benefit Analysis:
Process of making choices by carefully weighing costs and benefits.
But costs and
benefits are not
always so easy to
see!
Utility
• Utility is simply happiness or satisfaction
• People try to make good decisions in order to increase utility
How do people make choices?
–We try to make decisions that give us the greatest utility
–both short and long term
How can I maximize my utility?
Can you obtain utility from money?
• People value things differently due to different preferences
• 56% of employees would rather have an extra week of vacation than an extra week of pay. (CNNMoney.com)
Summary
In a world of scarcity, rational actors attempt to maximize utility by carefully weighing the costs and benefits of their decisions.
Average Earnings by Highest Degree Earned: 2002
No H. S.
H. S. Grad.
4 Year Degree
Master
18,826
27,280
42,623
48,598
Choices
Cost benefit analysis• A decision is economically “efficient” if the benefits outweigh the costs
Recognize Trade-offs
We make trade-offs when achieving one thing requires sacrificing something else.
Trade-offs
–Example: Spending a little more time studying means you sacrifice watching t.v., talking on the phone, and listening to the Spice Girls
Trade-offs
–Example: Hitting the snooze button involves sacrificing time to do your hair, eat breakfast, being in class, etc.
Trade-offs
–Example: Building a new wing onto RV means giving up computers, books, parking lots, basketball courts, etc.
There is no such thing as a free lunch
1.Any choice involves trade offs
2.Any choice costs you the opportunity to do something else
Opportunity Cost:• The most desirable
alternative given up as the result of a decision.
• Opportunity cost is what you would have done if you didn’t do what you did do.
Opportunity Cost:
• Opportunity cost is the runner-up in the choice contest.
• I chose to _________, therefore, I couldn’t _____________.
Reflection
• What part of the reading was most interesting to you?
• What do you agree or disagree with and why?
• Did you gain any insights? Explain.
Key Learnings
1. Scarcity is the fundamental problem of economics. (limited resources and unlimited wants)
Homework
“Health is our most precious asset. We have no choice but to preserve it.”
• Write a one-paragraph response explaining what is wrong with this quote (20 points)
True or False?
Going to college during an economic recession is cheaper than going to college during an economic boom.
Key Learnings
1. __________is the fundamental problem of economics. (limited _________and unlimited________)
Key Learnings
6. The most attractive alternative sacrificed when a choice is made is called _________ _____.
Opportunity Cost:• The most desirable
alternative given up as the result of a decision.
• Opportunity cost is what you would have done if you didn’t do what you did do.
Opportunity Cost:
• Opportunity cost is the runner-up in the choice contest.
• I chose to _________, therefore, I couldn’t _____________.
How do “rational” people make choices?
Cost-Benefit Analysis:
Process of making choices by carefully weighing costs and benefits.
But costs and
benefits are not
always so easy to
see!
You are very excited to go see your favorite band tonight and you already bought your ticket. Suddenly, your best friend calls to tell you of a great party going on tonight. You cannot attend both and you cannot sell your concert ticket.
Would it be economically efficient to go to the party even if you’ve already bought a concert ticket?
Sunk Cost
• A cost that cannot be avoided
–or has already been incurred
–Sunk costs should not influence future decisions
Sunk Cost
On a long road trip with your family, you stop at a roadside stand to buy apples. One hour later, while eating the apples, you discover that they have gone bad and taste horrible. Your father continues to eat the apples claiming that since they have been purchased, the apples must be eaten.
Sunk Cost
Carly spends thousands of dollars and four years earning a degree in accounting. She gets her first job and decides she hates accounting. She dreams of becoming a computer programmer, but claims that she can’t because she has already spent so much on her accounting degree.
Sunk Cost
• Example: The ticket already paid for
• Marketing angle: people are more likely to attend an event they have paid for (rather than one for which they receive a “free” ticket)