The Nature and Method of The Nature and Method of Economics Ch. 1Economics Ch. 1

A. EconomicsA. Economics—deals with the efficient —deals with the efficient use of scarce resources to achieve the use of scarce resources to achieve the maximum satisfaction of economic wants.maximum satisfaction of economic wants.– 1.We have unlimited wants/needs but only 1.We have unlimited wants/needs but only

have limited resources.have limited resources. Productive resources(Factors of Production) like:Productive resources(Factors of Production) like: Labor and managerial talent (Human Resources)Labor and managerial talent (Human Resources) Tools and machinery (Capital Resources)Tools and machinery (Capital Resources) Land and natural resources (Natural Resources)Land and natural resources (Natural Resources) Entrepreneurial resourcesEntrepreneurial resources

Nature of Economics 1.1Nature of Economics 1.1

So, the overriding economics challenge is: So, the overriding economics challenge is: How do we satisfy our How do we satisfy our unlimitedunlimited needs and needs and wants with out wants with out limitedlimited resources? resources?– Human and property resources scarceHuman and property resources scarce– We can’t “have it all” !We can’t “have it all” !

Must decide what we can have and what we Must decide what we can have and what we must delay or forgo.must delay or forgo.

Opportunity cost: The cost of that which you Opportunity cost: The cost of that which you get is the value of that which is sacrificed to get is the value of that which is sacrificed to obtain it.obtain it.

Rational Behavior 1.1Rational Behavior 1.1

Rational Self InterestRational Self Interest: Individuals : Individuals pursue actions that will enable them pursue actions that will enable them to achieve their greatest satisfaction.to achieve their greatest satisfaction.– College, get a job, join the Navy: choiceCollege, get a job, join the Navy: choice– Coke/Pepsi exampleCoke/Pepsi example– Contrast Contrast selfishnessselfishness and and self interestself interest

Behavior that enables a person to achieve Behavior that enables a person to achieve personal satisfaction, however it may be personal satisfaction, however it may be derived.derived.

Is this person’s decision rational?

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Marginal costs/benefits 1.1Marginal costs/benefits 1.1 MarginalMarginal: “extra, additional, or change : “extra, additional, or change

in.”in.”– Choices involve changes in the status quoChoices involve changes in the status quo

Another year of school?Another year of school?Study and extra hour for a test?Study and extra hour for a test?Add fries to your order?Add fries to your order?Business: Expand or reduce output?Business: Expand or reduce output?Government: Increase/decrease $ for the Government: Increase/decrease $ for the

missile defense system?missile defense system?– Each optionEach option involves: marginal benefits/costs involves: marginal benefits/costs– Marginal benefit always includes the marginal Marginal benefit always includes the marginal

cost of forgoing something else!cost of forgoing something else!

1. All Decisions are Made at the Margin.

MarginMargin: the weighing of : the weighing of additional costs and additional costs and additional benefits of a additional benefits of a specific change in the current specific change in the current situation.situation.

Who in here would not stop and Who in here would not stop and pick this up?pick this up?

Why? MB must be at least greater than the MC !

Why Study Economics? 1.1Why Study Economics? 1.1

World leaders routinely seek advice and World leaders routinely seek advice and council before making decisions.council before making decisions.

President of U.S. has his Council of President of U.S. has his Council of Economic Advisors.Economic Advisors.– UnemploymentUnemployment– GrowthGrowth– TaxationTaxation– Poverty concernsPoverty concerns– International tradeInternational trade– Health careHealth care

Citizenship of Economics 1.1Citizenship of Economics 1.1

We need to be well informed citizensWe need to be well informed citizens Today's political problems have Today's political problems have

economics concerns:economics concerns:– Budget deficitsBudget deficits– InflationInflation– Poverty index Poverty index – Social securitySocial security– Income taxesIncome taxes– International trade deficitsInternational trade deficits

Personal Applications 1.1Personal Applications 1.1

Economics involves precise, detailed, Economics involves precise, detailed, systematic analysis.systematic analysis.– Businesses like people who can do thisBusinesses like people who can do this– It helps us “make sense” of things going on It helps us “make sense” of things going on

around us each day; news, etc.around us each day; news, etc. Economics is important for Economics is important for businessbusiness::

– > Profits; when to hire more people?> Profits; when to hire more people?– When to invest in new equipment?When to invest in new equipment?– Understand causes of inflation, recession, etcUnderstand causes of inflation, recession, etc

Economics Applications 1.1Economics Applications 1.1

Helps workers and consumers:Helps workers and consumers:– How do you spend your money to How do you spend your money to

maximize your personal satisfaction?maximize your personal satisfaction?– More economical to lease or buy a car?More economical to lease or buy a car?– Use credit card or pay cash?Use credit card or pay cash?– What occupations pay well?What occupations pay well?