Chapter 1 CHOICES,THE BASICS
2
1.1 INTRODUCTION
3
Get to choose what
TV show to watch
Get extra dessert
at dinner
Do the laundry
Cook dinner
Household
Household
4
Society
What job will be done and who will do them
grow food
make clothing
design computer software…
Who will get the output of goods and service
Who will eat caviar and who will eat potatoes;
Who will drive Ferrari and who will take bus...
5
Let’s go!
6
1.2 THREE CONCEPTS
SCARCITY
CHOICES
OPPORTUNITY COST
7
1.2.1 SCARCITY
Definition
the limited nature of society’s resources.
1,we seek to satisfy our many and varied needs
and wants
2,but our income is scare
3,so we have to make choices about which needs
and wants we will satisfy.
Model
an assumption + a constraint = a consequence
8
NEEDS AND WANTS
Needs,need to survive
basic food,clothing,shelter
Wants,would like to have but not for
survive
fast food,chic clothing,good music
collection,tickets to rock concert…
9
NEEDS
Physiological needs
to remain alive physically
e.g,oxygen,water,basic food,shelter,
refuge…
Social needs
to belong to the society
e.g,TV set,radio,telephone…
10
1.2.2 CHOICE
Time of students
Income of family
Guns and butter
Efficiency and equity
11
Time of students
Watching TV
Time
Economics Psychology
Napping Part-time job
12
Income of family
buy food,clothing
family vacation
retirement
children’s college education
13
Income
wages or salaries
interest
profits
dividends
rent
14
Efficiency
The property of society getting the most it
can from its scarce resource
Equity
The property of distributing economic
prosperity fairly among the members of
society
15
Efficiency
Concerned with
inputs and outputs.
An efficient firm
products goods
economically.
It does things right.
Doing the right things.
This implies operating
in attractive markets
and making products
that consumers want
to buy.
Effectiveness
16
1.2.3 Opportunity Cost
Definition
The value of that which be given up to
acquire or achieve something.
the cost expressed in terms of the next best
alternative sacrificed.
Helps us view the true cost of decision
making
Implies valuing different choices
Examples
Bill Gates picking up 100 dollars
Going to the movies instead of studying
17
Going to college
Benefit
intellectual enrichment
a lifetime of better job opportunities
Cost
tuition,books,room,board
18
Analysis
This total does not truly represent what you
give up to spend a year in college.
1,Even if you quit school,you would need a
place to sleep and food to eat,Maybe the
savings on room and board are benefit of
going to school.
2,The wages gives up to attend school are
the largest single cost of their education
19
RESOURCES
that can be used in the making of products
Human resources - mental and manual
capacities
Natural resources - land
Manufactured resources - capital
Institutional resources – laws
20
Natural Resources
Minerals
Land
Forests
Rivers,lakes and seas
Fossil oil
Climate
21
How easy do you think it is to increase the quantity
of the following resources,both immediately and
over a period of a few years?
1,mental activity of workers;
2,manual activity of workers;
3,minerals
4,land
5,forests
6,rainfall;
7,machinery;
8,honesty
nonrenewable resources
renewable resources
22
nonrenewable resources
that cannot be replaced,except over
thousands or millions of years
renewable resources
that can be rehabilitated or renewed over
time
23
“I am social scientist,
Susan,That means I
can’t explain electricity
or anything like that,
but if you ever want to
know about people,
I’m your man.”
1.3 Thinking like an Economist
24
1.3.1 As Scientist
The Role of Money
Economic Model
Microeconomics & Macroeconomics
25
The Role of Money
unit of account
forms:
cash
electronic credit to deposit account at
banks,building societies and credit unions
26
Inflation
an increase in the overall level of prices in
the economy.
Assumptions
People spend all their money on widgets
The quantity of money increases from $20 million to $25 million
Constraint
Resource constrain total production of widgets to one million tones
each year
Consequence
Price of widgets rises from $2 to $ 2.50 each
27
Circular-Flow Diagram
Product
market
Factor
markets
Households Firms
28
Consumption products
benefit in terms of satisfaction of needs and wants
is immediate.
non-durables or durables
Investment products
benefit in terms of satisfaction of needs and wants
is spread over a long period of time or can be
used to produce other products.
not begin immediately.
29
The Production Possibilities Frontier
(PPF)
Quantity of Cars
Produced
Quantity of
Computers
produced
D
C A
B
0 300 600 700 1000
3,000
2,200
1,000
2,000
It shows the combinations of output-in this case,cars and
computers that the economy can possibly produce,The
economy can produce any combination on or inside the
frontier,Points outside the frontier are not feasible given
the economy’s resource.
30
A Shift in the Production Possibilities Frontier
Quantity of Cars
Produced
Quantity of
Computers
produced
0 700 750 1,000
4,000
3,000
2,000
2,100
A
E
An economic advance in the computer industry
shift the production possibilities frontier outward,
increasing the number of cars and computers
the economy can produce.
31
Microeconomics
the study of how households and
firms make decisions and how they
interact in markets.
effects of rent control on housing in the
city
impact of foreign competition on Chinese
auto industry
effects of compulsory school attendance on
workers’ earnings
32
Macroeconomics
the study of economy-wide
phenomena,including inflation,
unemployment,and economic
growth.
effects of borrowing by the government
changes over time in the economy’s rate
of unemployment
alternative policies to raise growth in
national living standards
33
1.3.2 As Policy Adviser
Positive Analysis
claims that attempt to describe the world as it is.
Normative Analysis
claims that attempt to prescribe how the world
should be.
Peter,The government
should raise the
minimum wage.
Polly,Minimum-wage laws
cause unemployment.
2
1.1 INTRODUCTION
3
Get to choose what
TV show to watch
Get extra dessert
at dinner
Do the laundry
Cook dinner
Household
Household
4
Society
What job will be done and who will do them
grow food
make clothing
design computer software…
Who will get the output of goods and service
Who will eat caviar and who will eat potatoes;
Who will drive Ferrari and who will take bus...
5
Let’s go!
6
1.2 THREE CONCEPTS
SCARCITY
CHOICES
OPPORTUNITY COST
7
1.2.1 SCARCITY
Definition
the limited nature of society’s resources.
1,we seek to satisfy our many and varied needs
and wants
2,but our income is scare
3,so we have to make choices about which needs
and wants we will satisfy.
Model
an assumption + a constraint = a consequence
8
NEEDS AND WANTS
Needs,need to survive
basic food,clothing,shelter
Wants,would like to have but not for
survive
fast food,chic clothing,good music
collection,tickets to rock concert…
9
NEEDS
Physiological needs
to remain alive physically
e.g,oxygen,water,basic food,shelter,
refuge…
Social needs
to belong to the society
e.g,TV set,radio,telephone…
10
1.2.2 CHOICE
Time of students
Income of family
Guns and butter
Efficiency and equity
11
Time of students
Watching TV
Time
Economics Psychology
Napping Part-time job
12
Income of family
buy food,clothing
family vacation
retirement
children’s college education
13
Income
wages or salaries
interest
profits
dividends
rent
14
Efficiency
The property of society getting the most it
can from its scarce resource
Equity
The property of distributing economic
prosperity fairly among the members of
society
15
Efficiency
Concerned with
inputs and outputs.
An efficient firm
products goods
economically.
It does things right.
Doing the right things.
This implies operating
in attractive markets
and making products
that consumers want
to buy.
Effectiveness
16
1.2.3 Opportunity Cost
Definition
The value of that which be given up to
acquire or achieve something.
the cost expressed in terms of the next best
alternative sacrificed.
Helps us view the true cost of decision
making
Implies valuing different choices
Examples
Bill Gates picking up 100 dollars
Going to the movies instead of studying
17
Going to college
Benefit
intellectual enrichment
a lifetime of better job opportunities
Cost
tuition,books,room,board
18
Analysis
This total does not truly represent what you
give up to spend a year in college.
1,Even if you quit school,you would need a
place to sleep and food to eat,Maybe the
savings on room and board are benefit of
going to school.
2,The wages gives up to attend school are
the largest single cost of their education
19
RESOURCES
that can be used in the making of products
Human resources - mental and manual
capacities
Natural resources - land
Manufactured resources - capital
Institutional resources – laws
20
Natural Resources
Minerals
Land
Forests
Rivers,lakes and seas
Fossil oil
Climate
21
How easy do you think it is to increase the quantity
of the following resources,both immediately and
over a period of a few years?
1,mental activity of workers;
2,manual activity of workers;
3,minerals
4,land
5,forests
6,rainfall;
7,machinery;
8,honesty
nonrenewable resources
renewable resources
22
nonrenewable resources
that cannot be replaced,except over
thousands or millions of years
renewable resources
that can be rehabilitated or renewed over
time
23
“I am social scientist,
Susan,That means I
can’t explain electricity
or anything like that,
but if you ever want to
know about people,
I’m your man.”
1.3 Thinking like an Economist
24
1.3.1 As Scientist
The Role of Money
Economic Model
Microeconomics & Macroeconomics
25
The Role of Money
unit of account
forms:
cash
electronic credit to deposit account at
banks,building societies and credit unions
26
Inflation
an increase in the overall level of prices in
the economy.
Assumptions
People spend all their money on widgets
The quantity of money increases from $20 million to $25 million
Constraint
Resource constrain total production of widgets to one million tones
each year
Consequence
Price of widgets rises from $2 to $ 2.50 each
27
Circular-Flow Diagram
Product
market
Factor
markets
Households Firms
28
Consumption products
benefit in terms of satisfaction of needs and wants
is immediate.
non-durables or durables
Investment products
benefit in terms of satisfaction of needs and wants
is spread over a long period of time or can be
used to produce other products.
not begin immediately.
29
The Production Possibilities Frontier
(PPF)
Quantity of Cars
Produced
Quantity of
Computers
produced
D
C A
B
0 300 600 700 1000
3,000
2,200
1,000
2,000
It shows the combinations of output-in this case,cars and
computers that the economy can possibly produce,The
economy can produce any combination on or inside the
frontier,Points outside the frontier are not feasible given
the economy’s resource.
30
A Shift in the Production Possibilities Frontier
Quantity of Cars
Produced
Quantity of
Computers
produced
0 700 750 1,000
4,000
3,000
2,000
2,100
A
E
An economic advance in the computer industry
shift the production possibilities frontier outward,
increasing the number of cars and computers
the economy can produce.
31
Microeconomics
the study of how households and
firms make decisions and how they
interact in markets.
effects of rent control on housing in the
city
impact of foreign competition on Chinese
auto industry
effects of compulsory school attendance on
workers’ earnings
32
Macroeconomics
the study of economy-wide
phenomena,including inflation,
unemployment,and economic
growth.
effects of borrowing by the government
changes over time in the economy’s rate
of unemployment
alternative policies to raise growth in
national living standards
33
1.3.2 As Policy Adviser
Positive Analysis
claims that attempt to describe the world as it is.
Normative Analysis
claims that attempt to prescribe how the world
should be.
Peter,The government
should raise the
minimum wage.
Polly,Minimum-wage laws
cause unemployment.
