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An Introduction to the “Dismal Science”

An Introduction to the “Dismal Science”. Choices, Scarcity, and Opportunity Costs Examined. The Rationale of Choice. People choose… Choices impose costs…costs are incurred when making decisions Choices involve trade-offs among alternatives. The Reason for Choice…. Lies in “ scarcity .”

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An Introduction to the “Dismal Science”

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  1. An Introduction to the “Dismal Science” Choices, Scarcity, and Opportunity Costs Examined

  2. The Rationale of Choice • People choose… • Choices impose costs…costs are incurred when making decisions • Choices involve trade-offs among alternatives

  3. The Reason for Choice… • Lies in “scarcity.” • All wants and needs are unlimited, and the resources to satisfy those wants/needs are limited • Ex.: Gas shortages in the 1970s • All nations face the problem of allocating limited resources…

  4. Economics • Is the social science that deals with this problem … it analyzes how society allocates its scarce resources among its unlimited wants/needs

  5. Opportunity Costs & Benefits • For every choice you make, there is an opportunity cost and opportunity benefit • Opportunity cost: value of the opportunity lost • Opportunity benefit: what you have gained

  6. If I go to the mall instead of doing my econ HW … • What will I lose??? A good grade for doing my HW. This is the opportunity cost. • What will I gain??? The fun of going to the mall. This is the opportunity benefit.

  7. If I do my econ HW instead of going to the mall… • What will I lose??? The fun of going to the mall. This is the opportunity cost. • What will I gain??? A good grade for doing my HW. This is the opportunity benefit.

  8. Another Opportunity Cost/Benefit Example • You have an allowance of $20/week for lunch • Pizza slice costs $2 and salad costs $4 • What can you buy? • A: 10 pizza slices, no salads (10 x $2 + 0 x $4) • B: 8 pizza slices, 1 salad (8 x $2 + 1 x $4) • C: 6 pizza slices, 2 salads (6 x $2 + 2 x $4) • D: 4 pizza slices, 3 salads (4 x $2 + 3 x $4) • E: 2 pizza slices, 4 salads (2 x $2 + 4 x $4) • F: no pizza, 5 salads (0 x $2 + 5 x $4)

  9. If you choose combination E instead of combination B … B: 8 pizza slices, 1 salad (8 x $2 + 1 x $4) E: 2 pizza slices, 4 salads (2 x $2 + 4 x $4) • What is the opportunity cost? • 6 pizza slices (8 minus 2) • What is the opportunity benefit? • 3 salads (4 minus 1)

  10. Micro vs. Macro • Microeconomics: examines individual choices concerning 1 product, firm, or industry (individual choice) • Macroeconomics: examines the behavior of the whole economy at once (social choice)

  11. 3 Basic Economic Questions • What to produce? • How to produce? • For whom to produce?

  12. There are basically 2 different ways to answer these questions… • Centralized economic systems (command economies): with common property ownership and centralized direction (Marx) • Decentralized economic systems (market economies): emphasizing private property and freedom of exchange (Smith)

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