CHAPTER1Economics:Foundations and ModelsChapterOutlineandLearningObjectives1.1ThreeKeyEconomicldeas1.2The Economic Problem ThatEverySocietyMustSolve1.3EconomicModels1.4MicroeconomicsandMacroeconomics1.5APreviewof ImportantEconomicTermsAPPENDIX:UsingGraphsandFormulas
1 Chapter Outline and Learning Objectives 1.1 Three Key Economic Ideas 1.2 The Economic Problem That Every Society Must Solve 1.3 Economic Models 1.4 Microeconomics and Macroeconomics 1.5 A Preview of Important Economic Terms APPENDIX: Using Graphs and Formulas CHAPTER 1 CHAPTER Economics: Foundations and Models
WhatlsThisClassAbout?People make choices as they try to attain their goals.Choices arenecessary because we live in a world of scarcityScarcity: A situation in which unlimited wants exceed the limitedresourcesavailabletofulfillthose wantsEconomicsisthestudyofthesechoicesEconomistsstudythesechoicesusingeconomicmodels,simplifiedversions of reality usedtoanalyze real-world economicsituations.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 What Is This Class About? People make choices as they try to attain their goals. Choices are necessary because we live in a world of scarcity. Scarcity: A situation in which unlimited wants exceed the limited resources available to fulfill those wants Economics is the study of these choices. Economists study these choices using economic models, simplified versions of reality used to analyze real-world economic situations
Typical"Economics"QuestionsWewill learn howto answer guestions like these:. How are the prices of goods and services determined?. How does pollution affect the economy, and how shouldgovernment policydeal withtheseeffects?. Why do firms engage in international trade, and how dogovernment policies affect international trade?: Why does government control the prices of some goods andservices, and what are the effects of those controls?@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 3 Typical “Economics” Questions We will learn how to answer questions like these: • How are the prices of goods and services determined? • How does pollution affect the economy, and how should government policy deal with these effects? • Why do firms engage in international trade, and how do government policies affect international trade? • Why does government control the prices of some goods and services, and what are the effects of those controls?
ThreeKeyEconomicldeas1.1LEARNINGOBJECTIVEExplainthesethreekeyeconomicideasPeoplearerational;Peoplerespondtoeconomicincentives;andOptimaldecisionsaremadeatthemargin@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 4 Three Key Economic Ideas 1.1 Explain these three key economic ideas: People are rational; People respond to economic incentives; and Optimal decisions are made at the margin
1.PeopleAreRationalEconomistsgenerallyassumethat peoplearerational.Rational: Using all available information to achieve your goalsRational consumers and firms weighthe benefits and costs of eachactionandtrytomakethebestdecisionpossibleExample:Microsoftdoesn'trandomlychoosethepriceofitsWindowssoftware;itchoosestheprice(s)thatitthinkswillbemostprofitable@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 5 1. People Are Rational Economists generally assume that people are rational. Rational: Using all available information to achieve your goals. Rational consumers and firms weigh the benefits and costs of each action and try to make the best decision possible. Example: Microsoft doesn’t randomly choose the price of its Windows software; it chooses the price(s) that it thinks will be most profitable
2.PeopleRespondto EconomicIncentivesAs incentives change, so do the actions that people will takeExample:Changes in severalfactorshaveresulted inincreasedobesity in Americans over the last couple of decades, including.:Decreases inthe price of fastfood relative tohealthful foodImprovednon-activeentertainmentoptionsIncreased availability of health care and insurance, protectingpeople against the consequences of theiractions@2015PearsonEducation,Inc.6
© 2015 Pearson Education, Inc. 6 2. People Respond to Economic Incentives As incentives change, so do the actions that people will take. Example: Changes in several factors have resulted in increased obesity in Americans over the last couple of decades, including: • Decreases in the price of fast food relative to healthful food • Improved non-active entertainment options • Increased availability of health care and insurance, protecting people against the consequences of their actions
3.Optimal DecisionsAre Made at theMarginWhile some decisions are all-or-nothing, most decisions involve doinga little more or a little less of something.Example: Should you watch an extra hour of TV, or study instead?Economists think about decisions like this in terms of the marginalcost and benefit (MC and MB): the additional cost or benefitassociated with a small amount extra of some actionComparing MC and MB is known as marginal analysis@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 3. Optimal Decisions Are Made at the Margin While some decisions are all-or-nothing, most decisions involve doing a little more or a little less of something. Example: Should you watch an extra hour of TV, or study instead? Economists think about decisions like this in terms of the marginal cost and benefit (MC and MB): the additional cost or benefit associated with a small amount extra of some action. Comparing MC and MB is known as marginal analysis
MakingHealth Insuranceand ObesitytheConnectionObesityisrising inAmerica,for various reasons.Isoneofthosereasonshealthinsurance?People with health insurance have less incentive to stay healthy thanpeople without health insurance.Holding constant other factors like age, gender, and income, researchshowspeoplewithhealthinsurancearemorelikelytobeobeseTheyarerespondingto economic incentives@2015PearsonEducation,Inc.?
© 2015 Pearson Education, Inc. 8 Making the Connection Health Insurance and Obesity Obesity is rising in America, for various reasons. Is one of those reasons health insurance? People with health insurance have less incentive to stay healthy than people without health insurance. Holding constant other factors like age, gender, and income, research shows people with health insurance are more likely to be obese. They are responding to economic incentives
TheEconomicProblemThatEverySocietyMustSolve1.2LEARNINGOBJECTIVEDiscusshowan economy answers thesequestions:Whatgoodsandserviceswillbeproduced?Howwill thegoodsand services beproduced?Whowill receive thegoods andservices produced?@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 9 The Economic Problem That Every Society Must Solve 1.2 Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?
1WhatGoodsandServicesWillBeProduced?Individuals,firms, and governments mustdecide on the goods andservices that should be produced.An increase in the production of one good requires the reduction inthe production of some other good. This is a trade-off, resulting fromthe scarcity of productive resources.The highest-valued alternative given up in order to engage in someactivity is known as the opportunity cost.Example:theopportunitycostof increasedfundingforspaceexploration might begivingupthe opportunitytofundcancerresearch.10@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 1. What Goods and Services Will Be Produced? Individuals, firms, and governments must decide on the goods and services that should be produced. An increase in the production of one good requires the reduction in the production of some other good. This is a trade-off, resulting from the scarcity of productive resources. The highest-valued alternative given up in order to engage in some activity is known as the opportunity cost. Example: the opportunity cost of increased funding for space exploration might be giving up the opportunity to fund cancer research