Chapter 1-7 Economics Vocabulary (Video)

Scarcity, Resources, and Basic Concepts

• Economics is the study of scarcity and how societies choose to allocate the final goods and services amid limited resources.

• Scarcity means we don’t have enough resources to produce all the goods and services we want, so choices must be made.

• We live in a world of scarcity because resources are limited while wants are unlimited.

• Real-life examples of scarcity include money limitations and limited time.

Four Categories of Resources (Factors of Production)

• Land and natural resources: forests, fish in the water, oil, minerals, rivers, etc. Everything found in nature counts as land/natural resources.

• Labor: physical and mental human effort. Includes market labor (paid work) and nonmarket labor (household work, such as homework, dishes, caregiving).

• Capital: tools, equipment, buildings, and other man-made resources used to produce goods and services.

• Entrepreneurship (often called entrepreneurship/enterprise): the ideas, risk-taking, organization, and management that drive production and innovation; the "half of the story" that brings an idea into reality.

• Note: Businesses decide how to combine these four resources to produce goods and services and maximize profit.

Goods vs. Services

• A good is something you can touch (tangible).

• A service is something that you cannot touch (intangible).

The 10 Principles (Key Takeaways Highlighted in Lecture)

• Principle 1 (mentioned, not required to memorize as a strict list): People face trade-offs due to scarcity.

• Trade-offs arise whenever we choose between alternatives; recognizing and identifying trade-offs is essential for decision making.

• A classic societal trade-off is guns vs. butter: efficiency vs. quality/priority of spending (defense vs. civilian goods).

• Public policy must balance efficiency (getting more output per input) with equity/quality of life; often there’s a tension between the two.

Trade-offs and Opportunity Cost

• Trade-off: giving up one thing to obtain another; arises from scarce resources and choice.

• Opportunity Cost: the value of the next best alternative forgone when making a choice.

• Example: At six in the morning, you have several alternatives (go for a run, make breakfast for kids, sleep a bit longer, read papers). You can do only one; the others represent opportunities you forgo.

• Everyday trade-offs include:

  • Working more hours vs. leisure time (time is limited to 24 hours per day).

  • The first classic society-wide trade-off: guns vs. butter (military spending vs. civilian needs and efficiency).

• The opportunity cost of an action is the value you place on the best alternative you gave up.

• When choosing, people often compare the value of the alternatives and pick the one with the lowest opportunity cost (in terms of forgone benefits).

Opportunity Cost Calculations and Examples

• College example: what to include in opportunity costs?

  • All money spent during college (tuition, books, supplies) is included, except room and board (usually excluded because it would be spent regardless of the college decision).

  • Foregone earnings (lost wages from not working full-time during college) are a key component of opportunity cost.

  • Foregone time is also an opportunity cost (time you could have spent working, traveling, or earning other experiences).

  • Time in college is a foregone alternative to other activities (backpacking, internships, etc.).

• Sunk costs: costs already incurred that cannot be recovered (e.g., a fixed paid lunch or a time/money already spent). Do not include sunk costs when making future decisions.

• No free lunch principle: because resources are used to produce lunch, there is a cost somewhere (time, money, or other resources); there is no truly zero-cost option.

• Money spent on lunch has an opportunity cost (e.g., the gas money you could have spent elsewhere; or the time you could have spent doing something else).

• The concept of foregone earnings is key when evaluating alternatives like going to college vs. entering the workforce or backpacking.

Marginal Analysis: Marginal Cost vs. Marginal Benefit

• Marginal Analysis looks at the incremental costs and benefits of a decision.

• Definitions:

  • Marginal Benefit (MB): the additional benefit received from doing one more unit of an action.

  • Marginal Cost (MC): the additional cost incurred from doing one more unit of an action.

  • Expressions:
    MB = \frac{\Delta B}{\Delta Q},\quad MC = \frac{\Delta C}{\Delta Q}

• Decision rule:

  • If MB > MC, take the action (the extra unit adds more benefit than it costs).

  • If MB < MC, do not take the action.

• Illustrative examples from the lecture:

  • Studying for an exam: early hours provide high marginal benefit that may diminish over time; marginal cost (time, fatigue) increases as you study more. The optimal study time is where MB ≈ MC.

  • Hiring an additional worker for a store: compare the marginal revenue (additional revenue) from hiring one more worker to the marginal cost (wage, benefits).

  • Watching one more movie on a break: compare marginal benefit (enjoyment) to marginal cost (lost sleep, time).

• In practice, you don’t need total profit calculations; you compare marginal values to decide.

• Real-world complication: incentives can shift MB and MC, affecting the decision (e.g., cash incentives, sales, penalties).

Incentives and Behavior

• Incentives are rewards or penalties that influence decisions.

• Positive incentives encourage an action (e.g., paying for good grades, pizza for a club, sale promotions).

• Negative incentives discourage an action (e.g., fines, taxes, penalties like a parking ticket).

• Changes in incentives can alter marginal benefits/costs and change behavior.

• Examples:

  • A store offers BOGO (buy one, get one) to encourage higher purchases.

  • Gas taxes or road taxes can influence consumer decisions and consumption patterns.

  • Seat belt laws increased safety but had unintended consequences (unintended outcomes) that policymakers must consider.

• Incentives apply to individuals, households, businesses, and society as a whole.

• Policymakers can use incentives to steer outcomes, but must consider potential unintended consequences.

Trade and Specialization: Gains from Trade

• Trade: an exchange between two decision makers (people, businesses, or countries).

• Not to be confused with trade-offs, which are the alternatives you give up when you choose one option over another.

• Gains from trade occur when each party can benefit from specialization and exchange.

• Conditions for gains from trade:

  • Trade must be voluntary.

  • Both parties must gain; each must prefer what they receive over what they give up.

• Specialization and comparative advantage:

  • Parties specialize in what they do best, producing at a lower opportunity cost.

  • By trading, parties can consume beyond their own production possibilities.

• The basic intuition: exchanging cookies for apples or trading across countries allows everyone to be better off when each party specializes where they have a lower opportunity cost.

• Trade creates value and can increase overall welfare when based on comparative advantage and voluntary exchange.

Practical Takeaways and Connections to Real Life

• Always identify the trade-offs you face (what you must give up when you choose).

• Explicitly consider opportunity costs to make better decisions, not just the monetary costs.

• Distinguish between money spent (which has an opportunity cost) and sunk costs (which should be ignored when deciding in the future).

• Use marginal analysis to determine how much of an activity to engage in (study hours, hiring, consumption) by balancing additional benefits against additional costs.

• Recognize how incentives shape behavior and potential unintended consequences of policies or rules.

• Understand that trade and specialization can generate value and improve welfare when decision-makers act voluntarily and with informed preferences.

Quick Reference Formulas and Concepts

• Scarcity: limited resources vs. unlimited wants.

• Opportunity Cost: the value of the next best alternative forgone when making a choice.
  OC = ext{value of the next best alternative foregone}

• Foregone earnings (a common opportunity cost in education decisions): time and wages you give up by choosing one path over another.

• Sunk costs: costs already incurred that cannot be recovered; should not affect future decisions.

• Marginal Analysis:
  MB = \frac{\Delta B}{\Delta Q},\quad MC = \frac{\Delta C}{\Delta Q}
  Decision rule: if MB > MC, do it; if MC > MB, don't do it.

• Trade vs. Trade-offs:

  • Trade-offs are alternatives you sacrifice when making a choice.

  • Trade is an exchange between decision-makers that can create value and make both parties better off when based on voluntary participation and comparative advantages.

Real-World Relevance and Ethical/Practical Implications

• Public policy = balancing efficiency (maximizing output with given resources) and equity/quality of life. Policies that overemphasize efficiency may reduce quality; those focused on equity may reduce incentive to produce.

• Understanding sunk costs helps avoid the sunk-cost fallacy: continuing costly investments because of what’s already spent rather than based on future benefits.

• Incentives can be used to promote safety, healthier behavior, or economic growth, but designers must anticipate and mitigate unintended consequences (e.g., safety devices changing behavior in unexpected ways).

• Global and domestic trade decisions rely on comparative advantage and voluntary exchange to improve welfare, but considerations include distributional effects, policy barriers, and strategic incentives.

Quick Illustrative Scenarios (Practice Feel)

• If you’re deciding whether to fix a transmission in a car:

  • Marginal Benefit (MB) = increased resale value or longer usable life after repair.

  • Marginal Cost (MC) = repair cost.

  • If MB > MC, fix; if MB < MC, don’t fix.

• If a store contemplates hiring one more employee for a week:

  • Marginal Revenue (additional income) vs. Marginal Cost (wages).

  • If MB > MC for that week, hire; otherwise not.

• If you’re offered a ride to the airport by a best friend and you value your time:

  • Consider the marginal benefit of helping a friend against the marginal cost of several hours of your time.

  • Introducing a monetary incentive (cash + gas paid) can shift the decision toward providing the ride.

• When considering a break or a trip with family:

  • Build a pros/cons list by assigning values where possible and noting non-monetary factors; compare marginal benefits to marginal costs.

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