The Major Ideas That Drive The Concept of Economics Michelle Holmes Economics Sept.27, 2011
What major ideas drive the concept of economics?
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Scarcity vs. Needs Opportunity Cost Marginal Cost Marginal Benefit Incentives
What is the causal relationship between scarcities and needs? •
People have unlimited wants but resources are limited.
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These resources are the input of production: land, labor, and capitol. –
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Example: Currently people want jobs but there aren’t enough jobs for everyone.
Because of scarcity, economic decisions must be made in order to best decide how to divide resources efficiently.
Choices •
People must make choices between different items because necessary resources may be limited.
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These decisions are sometimes made by giving up one want to satisfy another.
What are Opportunity Costs? •
Opportunity Cost: The money or other benefits lost when pursuing a particular course of action instead of a mutually exclusive alternative. –
For example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.
What are Marginal Costs? •
Marginal Costs: At each level of production includes any additional costs required to produce the next unit. – For example, if producing additional vehicles requires, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory.
What are Marginal Benefits? •
Marginal Benefits: The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. – For example, Consumers make rational decisions. If two products are of equal benefit to a consumer, then he or she will choose the cheaper product. If two products are the same price, the consumer will choose the one that provides the higher benefit.
What are incentives and how do they cause changes in behavior? •
Incentives are rewards that motivate desirable actions. – Examples • Positive economic incentives reward people financially for making certain choices and behaving in a certain way. • Negative economic incentives punish people financially for making certain choices and behaving in a certain way.
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Scarcity: Insufficiency or shortness of supply. Seasonal Scarcity: All consumable produce is grown in cycles. Incentives: Something that incites or tends to incite to action or greater effort, as a reward offered for increased productivity. Total Cost: Describes the total economic cost of production and is made up of variable costs. Variable Cost: A cost of labor, material or overhead that changes according to the change in the volume of production units.
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Fixed Cost: Are business expenses that are not dependent on the level of goods or services produced by the business. Transaction Cost: Is a cost incurred in making an economic exchange.