An Introduction to the

1
An Introduction to the Dismal Science

• Choices, Scarcity, and Opportunity Costs Examined

2
The Rationale of Choice

• People choose
• Choices impose costscosts 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

1. What to produce?
2. How to produce?
3. For whom to produce?

12
There are basically 2 different ways to answer
these questions

1. Centralized economic systems (command economies)
   with common property ownership and centralized
   direction (Marx)
2. Decentralized economic systems (market
   economies) emphasizing private property and
   freedom of exchange (Smith)