Micro Economics Chapter 1

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  • Topic: Economics, Opportunity cost, Scarcity
  • Pages : 24 (2151 words )
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  • Published : November 1, 2012
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Chapter 1:
Limits, Alternatives and
Choices

The fundamental economic problem
Scarcity:
– The basic economic problem arises because
resources are limited, but human wants are
unlimited.
– Scarcity. . . means that society has limited
resources and therefore cannot produce all
the goods and services people wish to have.

What is economics?
• Economics is the study of how individuals and
economies deal with the fundamental problem of
scarcity.
• Scarcity forces individuals, firms, governments and
societies to make choices.

• Choice, therefore, is a direct result of scarcity.
• Because resources are both desirable and scarce, we
must choose how we will allocate them among
various uses.

Allocation of resources: 3 fundamental
questions
• Any individual, organization or nation has to
make three fundamental types of choices about
how to allocate the scarce resources available:
1. What to produce – food or industrial machinery,
books or newspapers…
2. How to produce – how many workers will be used,
with what machinery…
3. For whom to produce – will some people get a
bigger share of resources than other?

Allocation of resources: 3 fundamental
questions

Production is the process that transforms
scarce resources into useful goods and services.

Factors of production
The basic resources that are available to a society are factors of production:
1. Land: natural resources, the “free gifts of nature”
2. Labor: the contribution of human beings
3. Capital: plant and equipment
4. Entrepreneurial ability: takes initiatives, makes decisions, innovates, and takes risks
- Resources or factors of production are the inputs into the process of production.
- Goods and services are the outputs of the process of
production.

Resource payments
Economic Resource

Resource payment

land

rent

labor

wages

capital

interest

entrepreneurial ability

profit

Capital Goods and Consumer
Goods
• Capital goods are goods used to produce
other goods and services.
• Consumer goods are goods produced for
present consumption.

• Investment is the process of using resources
to produce new capital.

Efficiency and Equity
– Efficiency means society produces what

people want at the least possible cost.
– Equity means the benefits of those resources

are distributed fairly among the members of
society.

The Economic Perspective
• Thinking like an economist:
– The study of economics teaches us a way of thinking
and helps us make decisions.
– Choices involve tradeoffs.
– Tradeoffs involve opportunity costs.

• How people make decisions?

1: People Face Tradeoffs
“There is no such thing as a free lunch!”

1: People Face Tradeoffs
To get one thing, we usually have to give up
another thing.
– Food v. clothing
– Leisure time v. work

Making decisions requires trading
off one goal against another.

2: The Cost of Something Is What You
Give Up to Get It
• Decisions require comparing costs and benefits of
alternatives.
– Whether to go to college or to work?
– Whether to go to class or sleep in?

• The opportunity cost of an item is what you give up
to obtain that item.

• It is the value of the second best alternative forgone.
• It is the benefit that is lost in making a choice
between two competing uses of scarce resources.

2: The Cost of Something Is What You
Give Up to Get It

2: The Cost of Something Is What You
Give Up to Get It
• Everything has an opportunity cost.

3: Rational self-interest
• Individuals select the choices that make them
happiest, given the information available at the
time of a decision.
• Because they weight costs and benefits, their
economic decisions are ‘rational’.

4: Rational People Think at the Margin
• Economic thinking is marginal thinking.
• The word marginal means ‘one more’:
• If I consider eating one more slice of pizza, I
ask myself, what is the benefit of one more
slice...
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