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An Introduction to the “Dismal Science”

An Introduction to the “Dismal Science”

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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)