Unit 1: The Nature and Importance of Economics

1. Unit 1: The Nature and Importance of Economics

2. Outline • Review of Chapter 1 • 5 Key Principles of Economics • Principle of Opportunity Cost • Production Possiblities • Marginal Principle • Marginal Benefit vs Marginal Cost • Remaining Principles • Principle of Diminishing Returns • Spillover Principle • Reality Principle • Class Activity

3. Review of Chapter 1 • Economics = study of the choices made when there is a scarcity of resources. • Choices: An economic decision always aims to answer one of the following Qs: • What to produce? • How to produce it? • Who will consume this product?

4. Review of Chapter 1 • Scarcity: when the availability of a resource is limited, we must make sacrifices • One good/service for another • Example: a city has a limited amount of land, and must decide whether to build more parks, or more apartments • Resources: There are 5 categories of resources used to produce goods (Factors of Production): • Natural Resources • Labor • Physical Capital • Human Capital • Entrepreneurship

5. Review of Chapter 1 • Market = an arrangement that allows buyers and sellers to exchange things • Trade what you have for what you want • Most economic decisions (the 3 Qs) are made in, or are influenced by markets • Marginal = a small amount • marginal change is a change in one unit of a variable. • marginal analysis is used to analyze how a change in one unit of a variable causes a change in another

6. 5 Key Principles of Economics

7. Principle of Opportunity Cost • No matter what decision we make, there is always a trade-off • “No such thing as a free lunch” • Any time we acquire something, we have used up a resource that could have been used to acquire something else • Ex: listen to a sales pitch for a free sample. • What has been sacrificed? • Opportunity Cost = what you sacrifice in order to get something

8. Principle of Opportunity Cost • When we make a decision, we are choosing something over an alternative • To determine the opportunity cost, we look at the best alternative • Ex. Studying for Economics exam instead of studying for History, or playing video games. • What is the opportunity cost? • Can we quantify it?

9. Production Possibilities Curves

10. Principle of Opportunity Cost • Your turn: • What could be the opportunity cost of a part-time job while attending University? • There are many possibilities

11. Marginal Principle • Helps make economic decisions easier • Economists consider how a one-unit (marginal) change in one variable affects the value of another variable • Ex: Should a store-owner keep his shop open one hour longer? • We must compare the marginal benefit with the marginal cost • Benefit = the extra bonus that results from the small change • Cost = the additional costs associated with the small change

12. Marginal Principle • Marginal principle = increase the level of an activity its its marginal benefit exceeds its marginal cost. If possible, choose a level of production where the marginal benefit equals the marginal cost. Marginal Benefit Marginal Cost

13. Key Principles of Economics Principle of Diminishing Returns • When there are two or more inputs involved in producing something (output) • If we continue to increase only one input, eventually a point is reached where the output increases by smaller, and smaller amounts

14. Key Principles of Economics Spillover Principle • The costs or benefits of producing something, sometimes spill over to people or organizations that are not involved in producing or consuming them Reality Principle • What matters to people is the real value of money or income. In other words, its purchasing power. • How much can I get for the money I have?

15. Critical Thinking Activity • Read p. 31 in your textbook • “ Why Are We Getting Bigger?” • Imagine you are an organization hired by the national government to solve this issue. Propose a solution that makes use of the principle of opportunity cost and marginal principle.