Econ Course Overview I.Fundamentals of Economic Thought –A different way of thinking about choices.

Econ Course Overview

 I.Fundamentals of Economic Thought

–A different way of thinking about choices

Econ Course Overview

II.Microeconomics-The study of the economic behavior and decision-making of small units, such as individuals, families, and businesses.-(Prices of single items, markets, business decisions)

Econ Course Overview

III. Macroeconomics

-The study of the behavior and decision making of entire economies.

-(unemployment, inflation, production of a country, international trade)

Why Study Economics?

1. Literacy

2. Explanations and understanding of markets, prices, behavior

3. Improve decision-making skills

4. Improve critical thinking

5. Solve problems

Fundamentals of Economics

Unit One: Fundamentals

Guiding Question:

How can economics help us make better decisions?

Fundamentals of Economics

True or False?

The best things in life are free

EconomicsThe study of how

individuals and societies try to satisfy wants and needs by choosing how to use scarce resources.

What resources do we have?

• Resources are anything we can use to attain our wants and needs.

Introductions

• Name

• One want (appropriate)

• Anything else?

What are the differences between wants and needs?

Scarcity

• Fundamental economic problem facing all societies that results from a combination of limited resources and people’s virtually unlimited wants.

• “We can’t have everything

we want”

How do people deal with scarcity?

• Scarcity forces us to choose

• We can’t avoid making choices about resource use

True or false?The best things in life are free.

True or false?The best things in life are free.

When we consider scarcity, are the best things in life really free?

Reading: Naked Econ, pp.4-9

1. Select 3 phrases and be able to explain your thoughts.

2. Write one question you have related to the reading.

3. Discuss with the person sitting next to you.

Homework

1. What are your economic concerns right now?

2. What work experiences do you have?

3. Where do you see yourself in 5 years?

4. What are your interests?

5. What do I need to know about you?

• Answer all questions, typed and double-spaced.

How do we make choices?

The Rational Actor Model

– AKA-Homo-economicus or “economic man”

The Rational Actor Model

Assumptions:

1. Humans are self-interested (not selfish, but act in ways consistent with our preferences)

2. Humans are rational (can choose behavior appropriate to achieve goals)

Are we rational?

• A $20 toaster is on sale for ½ price across town. Would you go buy it?

• An oven that sells for $500 at a nearby store is on sale for $490 across town. Which would you buy?

How do “rational” people make choices?

Cost-Benefit Analysis:

Process of making choices by carefully weighing costs and benefits.

But costs and

benefits are not

always so easy to

see!

How do people make choices?

• People try to maximize benefits and minimize costs

Utility

• Utility is simply happiness or satisfaction

• People try to make good decisions in order to increase utility

How do people make choices?

–We try to make decisions that give us the greatest utility

–both short and long term

How can I maximize my utility?

Can you obtain utility from money?

• People value things differently due to different preferences

• 56% of employees would rather have an extra week of vacation than an extra week of pay. (CNNMoney.com)

Summary

Summarize what we have just learned by writing a sentence using the vocab words.

Summary

In a world of scarcity, rational actors attempt to maximize utility by carefully weighing the costs and benefits of their decisions.

Choices

• How can we make better choices?

Cost Benefit Analysis:Costs and Benefits of a High

School Diploma

Cost Benefit Analysis:Costs and Benefits of a High

School DiplomaCosts Benefits

Average Earnings by Highest Degree Earned: 2002

No H. S.

H. S. Grad.

4 Year Degree

Master

18,826

27,280

42,623

48,598

Choices

Cost benefit analysis• A decision is economically “efficient” if the benefits outweigh the costs

Recognize Trade-offs

We make trade-offs when achieving one thing requires sacrificing something else.

Trade-offs

–Example: Spending a little more time studying means you sacrifice watching t.v., talking on the phone, and listening to the Spice Girls

Trade-offs

–Example: Hitting the snooze button involves sacrificing time to do your hair, eat breakfast, being in class, etc.

Trade-offs

–Example: Building a new wing onto RV means giving up computers, books, parking lots, basketball courts, etc.

True or False:

“There is no such thing as a free lunch”

There is no such thing as a free lunch

1.Any choice involves trade offs

2.Any choice costs you the opportunity to do something else

Opportunity Cost:• The most desirable

alternative given up as the result of a decision.

• Opportunity cost is what you would have done if you didn’t do what you did do.

Opportunity Cost:

• Opportunity cost is the runner-up in the choice contest. 

• I chose to _________, therefore, I couldn’t _____________.

Video Time!

Reflection

• What part of the reading was most interesting to you?

• What do you agree or disagree with and why?

• Did you gain any insights? Explain.

Key Learnings

1. Scarcity is the fundamental problem of economics. (limited resources and unlimited wants)

Key Learnings

2. Scarcity forces us to choose.

Key Learnings

3. Rational actor model claims that humans are rational and self-interested.

Key Learnings

4. Humans weigh costs and benefits in order to maximize utility.

Key Learnings

5. An action is economically “efficient” as long as the benefits outweigh the costs

Homework

“Health is our most precious asset. We have no choice but to preserve it.”

• Write a one-paragraph response explaining what is wrong with this quote (20 points)

True or False?

Going to college during an economic recession is cheaper than going to college during an economic boom.

True or False?

Attending economics class is the best use of your time.

Key Learnings

1. __________is the fundamental problem of economics. (limited _________and unlimited________)

Key Learnings

2. Scarcity forces us to____________.

Key Learnings

3. Rational actor model claims that humans are ___________and self-interested.

Key Learnings

4. Humans weigh costs and benefits in order to maximize_________.

Key Learnings

5. An action is economically ________as long as the benefits outweigh the costs

Key Learnings

6. The most attractive alternative sacrificed when a choice is made is called _________ _____.

Opportunity Cost:• The most desirable

alternative given up as the result of a decision.

• Opportunity cost is what you would have done if you didn’t do what you did do.

Opportunity Cost:

• Opportunity cost is the runner-up in the choice contest. 

• I chose to _________, therefore, I couldn’t _____________.

How do “rational” people make choices?

Cost-Benefit Analysis:

Process of making choices by carefully weighing costs and benefits.

But costs and

benefits are not

always so easy to

see!

You are very excited to go see your favorite band tonight and you already bought your ticket. Suddenly, your best friend calls to tell you of a great party going on tonight. You cannot attend both and you cannot sell your concert ticket.

Would it be economically efficient to go to the party even if you’ve already bought a concert ticket?

Sunk Cost

• A cost that cannot be avoided

Sunk Cost

• A cost that cannot be avoided

–or has already been incurred

–Sunk costs should not influence future decisions

Sunk Cost

On a long road trip with your family, you stop at a roadside stand to buy apples. One hour later, while eating the apples, you discover that they have gone bad and taste horrible. Your father continues to eat the apples claiming that since they have been purchased, the apples must be eaten.

Sunk Cost

• Example: The ticket already paid for

• Broncos tickets

• Ski passes

Sunk Cost

Carly spends thousands of dollars and four years earning a degree in accounting. She gets her first job and decides she hates accounting. She dreams of becoming a computer programmer, but claims that she can’t because she has already spent so much on her accounting degree.

Sunk Cost

• Example: The ticket already paid for

• Marketing angle: people are more likely to attend an event they have paid for (rather than one for which they receive a “free” ticket)

Sunk Cost

• Practice!

Key Learnings

7. Costs that cannot be avoided are called _______ costs.