Economics and Economic Reasoning pptx
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© 2003 McGraw-Hill Ryerson Limited.
Economics and
Economics and
Economic Reasoning
Economic Reasoning
Chapter 1
Chapter 1
© 2003 McGraw-Hill Ryerson Limited
What Economics Is
What Economics Is
◆
Economics is the study of how human
beings coordinate their wants and
desires, given the decision-making
mechanisms, social customs, and
political realities of the society.
© 2003 McGraw-Hill Ryerson Limited
What Economics Is
What Economics Is
◆
One of the key words in the definition of
the term “economics” is coordination.
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What Economics Is
What Economics Is
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Three central coordination problems
any economic system must solve are:
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What Economics Is
What Economics Is
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Scarcity ensues because individuals
want more than can be produced.
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Scarcity !
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What Economics Is
What Economics Is
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The degree of scarcity is constantly
changing.
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The quantity of goods, services, and usable
resources depends on technology and
human action.
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What Economics Is
What Economics Is
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The following are the five important
things to learn in economics:
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What Economics Is
What Economics Is
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The following are the five important
things to learn in economics (cont’d):
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)
A Guide to Economic
A Guide to Economic
Reasoning
Reasoning
◆
Economic reasoning is making
decisions by comparing costs and
benefits.
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*
Marginal Costs and
Marginal Costs and
Marginal Benets
Marginal Benets
◆
The relevant costs and benefits to
economic reasoning are the expected
incremental or additional costs incurred
and the expected incremental or
additional benefits of a decision.
© 2003 McGraw-Hill Ryerson Limited
Marginal Costs and
Marginal Costs and
Marginal Benets
Marginal Benets
◆
In economists’ jargon, marginal refers to
additional or incremental.
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+,!one more
© 2003 McGraw-Hill Ryerson Limited
Marginal Costs and
Marginal Costs and
Marginal Benets
Marginal Benets
◆
Marginal cost = the additional cost to
you over and above the costs you have
already incurred.
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+sunk costs
"
© 2003 McGraw-Hill Ryerson Limited
Marginal Costs and
Marginal Costs and
Marginal Benets
Marginal Benets
◆
Marginal benefit = the additional
benefit above and beyond what you’ve
already accrued.
© 2003 McGraw-Hill Ryerson Limited
Marginal Costs and
Marginal Costs and
Marginal Benets
Marginal Benets
◆
According to the economics decision
rule:
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.
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(!!
. -#
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Economics and Passion
Economics and Passion
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Economic reasoning is based on the
premise that everything has a cost.
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Reasonable economic solutions are
often not the most popular, as economic
reasoning may take some passion out
of life.
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Opportunity Cost
Opportunity Cost
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Opportunity cost – the basis of
cost/benefit economic reasoning; it is a
cost of the activity you have chosen
measured by the benefit foregone of the
next-best alternative.
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Opportunity Cost
Opportunity Cost
◆
In economic reasoning, opportunity cost
must be less than the benefit of the
choice you have made.
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Opportunity Cost
Opportunity Cost
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Opportunity costs are not limited to
individual decisions but to government
decisions as well.
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)
Opportunity Cost
Opportunity Cost
◆
The opportunity cost concept applies to
all aspects of life and is fundamental to
understanding how society reacts to
scarcity.
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*
Economics and Market
Economics and Market
Forces
Forces
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When goods are scarce, they must be
rationed.
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Rationing
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Economic and Market
Economic and Market
Forces
Forces
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One of the important choices that a
society must make is to what extent
economic forces are allowed to function
freely.
© 2003 McGraw-Hill Ryerson Limited
Economic and Market
Economic and Market
Forces
Forces
◆
A market force is an economic
circumstance that is given relatively free
rein by society to work through the market.
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/,! "
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Economic and Market
Economic and Market
Forces
Forces
◆
Economic reality is controlled by three
forces:
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&!0 1
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2!
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3!
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Economic and Market
Economic and Market
Forces
Forces
◆
Economic forces:
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+ invisible hand4
!!4,
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Economic and Market
Economic and Market
Forces
Forces
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Social and cultural forces, political and
legal forces:
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3!!,
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"
!
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