ECO 2023 - Unit 1/Ch. 1: Intro to Economics

Dr. Martinez ECO 2023 Fall 2025 09-09-2025 Tues

4 Foundations for making an economic decision:

benefits, costs, tradeoffs, and regulations

benefit

a sense of accomplishment, positive gain from a decision, action, or transaction

cost

including monetary value of resources, money, and time expended in producing a good or service, or for choosing one option over another. As well as physical demands on the body, and a risk of injury.

tradeoffs

act of giving up one benefit or opportunity to gain another, often because resources (like time, money, or energy) are limited.

Economics

about making choices to maximize their well-being given limitations

• the study of how individuals, firms, and society make decisions to allocate limited resources among many competing wants.

Scarcity

having too many wants but too few resources

• people must make choices given the resource limitations they face

Scarcity vs Shortage

A shortage is a temporary situation where the quantity demanded exceeds the quantity supplied at a given price, whereas scarcity is the perpetual condition of limited resources.

What are the consequences of scarcity?

1. Choice and allocation: forces you to make choices and how to allocate resources

2. Opportunity cost: value of next best alternative that must be given up

3. Rationing: system to decide who receives scarce goods/services

4. Economic systems: develop systems to answer: what to produce, how to “, and for whom to “

5. Competition

Incentives

factors that motivate individuals and firms to make decisions in their best interest

Microeconomics

the study of the decision-making by individuals, businesses, and industries

• what to buy, which job to take, where to go on vacation

• which items a business should produce, and at what price, and whether a market should be left on its own or be regulated

• labor laws, environmental policy, health care policy

• i = individual

Macroeconomics

the study of broader issues in the economy such as inflation, unemployment, and national output of goods and services

• economic growth, recession, business cycles

• government spending and taxation

• effect of monetary policy

• international trade and finance

• a = all or aggregate

Model

a simplification of the real world that allows one to analyze a situation more easily

Ceteris paribus

holding all other things equal

assumption used in economics (and other disciplines as well) that other relevant factors or variables are held constant

Efficiency

a measure of how well resources are used and allocated

Different measures include production efficiency, allocative efficiency, and Pareto efficiency

production efficiency

when goods are produced at the lowest cost

allocative efficiency

when individuals who desire a product the most obtain those goods and services

Pareto efficiency

when society improves the well-being of as many individuals as possible without making anyone worse off

Equity

fairness of various issues and policies

Positive analysis

the use of statements or questions that are based on the understanding of information or facts

Normative analysis

the use of statements or questions that are based on opinions or societal beliefs on what should or should not take place

Microeconomic or macroeconomic issue: HP Inc. announces that it is lowering the price of its printers by 15%.

1. Microeconomic issue

Microeconomic or macroeconomic issue: The president proposes a tax cut.

2. Macroeconomic issue

Microeconomic or macroeconomic issue: You decide to look for a new job.

3. Microeconomic issue

Microeconomic or macroeconomic issue: The economy is in a recession, and the job market is worsening.

4. Macroeconomic issue

Microeconomic or macroeconomic issue: The Federal Reserve announces that it is raising interest rates because it fears inflation.

5. Macroeconomic issue

Microeconomic or macroeconomic issue: You receive a nice raise.

6. Microeconomic issue

Microeconomic or macroeconomic issue: Average wages grew by 2% last year.

7. Macroeconomic issue

How many key principles does economics have?

8 key principles

Principle 1

Economics is concerned with Making Choices with Limited Resources

Are money matters an important issue studied in economics?

yes

Principle 2

When Making Decisions, One Must Take into Account Tradeoffs and Opportunity Costs

Opportunity cost

the value of the next best alternative use of resources

Opportunity cost for individuals:

it is what one gives up when choosing an activity or making a purchase

Opportunity cost for businesses or societies:

it is the cost of producing a product in terms of the amount of another product that must be forgone

Principle 3

Specialization Leads to Gains for All Involved

Specialization

allows individuals to achieve productivity gains as long as the work is shared in a mutually beneficial manner.

Principle 4

People Respond to Incentives, Both Good and Bad

Ex: Want to encourage more ride-share drivers to work during peak holiday periods?

Charge higher fares during these periods

Principle 5

Rational Behavior Requires Thinking on the Margin

marginal analysis

comparing the incremental benefit of an additional unit of an activity (like consuming one more slice of pizza) to its incremental cost (the additional price of that slice) to make optimal “how much” decisions.

marginal = additional

Principle 6

Markets Are Generally Efficient; When They Aren’t, Government Can Sometimes Correct the Failure

what happens when a market fails?

government regulation is used to protect consumers

Principle 7

Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always Coincide

Measures of economic growth:

1. average household income

2. quality of education

3. infrastructure development

4. improvement in technology and innovation

5. environmental sustainability

6. poverty reduction

Principle 8

Institutions and Human Creativity Help Explain the Wealth of Nations

McDonald’s introduced a premium blend of coffee that sells for more than its standard coffee. How does this represent thinking at the margin?

McDonald’s is adding one more product (premium coffee) to its line. Thinking at the margin entails thinking about how you can improve an operation (or increase profit) by adding to your existing product line or reducing costs

Scarcity vs. scarce

Large uncut diamonds are scarce—only a few are found in the world each year. A car is less scarce, as car dealerships around the country have lots of them. But both large diamonds and cars are subject to scarcity—many people want them but can only buy what they can afford.

Why do markets typically lead to an efficient outcome for buyers and sellers?

because competition and the interaction of supply and demand naturally drive prices to a point where mutually beneficial transactions are maximized, ensuring resources are allocated to their most valued uses and total surplus is maximized.