Fundamental Economic concepts (FECs) Economics- Unit 1: Chapter 1-2

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FEC #1- Scarcity and choice

What I need to live:

Food
Water
Air
Shelter
Jesus
Sleep

What I want to have:

A job I love
To be happy with my life
Get married
Have kidsScarcity everything and everywhere is limited
Resources:
- Land- anything on the land or in the land that has value; examples: ON: trees, crops, livestock, building; IN: water, oil, gold
- Labor- workers and their level of education and experience; examples: teacher with no experience not as good
- Capital- any good or service used to produce another good or service; examples: car with all parts (lots of capital)
- Entrepreneurial ability (sometimes called managerial ability)- ability to take land, labor, and capital and create a good or service that people want to buy; examples: good management
Goal of all Economics- limited resources with unlimited wants and needs- goal is to stretch out resources to meet as many wants and needs as possible
- Forces us to MAKE CHOICES
FEC #2- Rationality
- Economics is based on the fact that our choices are rational and, therefore, meet our utility
  - Utility- your happiness or satisfaction
  - Rational self-interest– your personal utility (happiness) your rational self-interest is different than anyone else’s bc based on your own personal thought process
  - How do you know if something is rational?
- Cost Benefit Analysis- a way to illustrate a choice or decision
  - A cost is a con; the benefit is a pro
  - Weigh the costs and benefits
  - If the benefits outweigh the costs- the choice is rational
- Microeconomics- decision-making by individuals, households, and businesses (examples: pay bills, family vacation)
- Macroeconomics- decision-making by governments or countries (how much taxes, should we drill for oil)
FEC #3- Trade-offs and Opportunity Costs
- List anything you've ever gotten for free
  - What makes these things free? No cost
- Famous Economics Saying: “There is no such thing as a free lunch.”
  - Nothing is free.
- Costs are more than just money- time and energy; if you give something up it could be a cost (it can be anything)
- Trade off- the choice you did not choose (go home to take a nap instead of working out)
- Opportunity cost- benefits of the choice you didn’t make; the benefits become costs (go to UTC instead of UTK lose the choice of an SEC school)
- Cost Benefit Analysis
  - Chick Fil A
  - Costs: chicken minis stop at 10:30, closed on Sundays, limited options
  - Benefits: not far from home, mostly quick, good fries
  - trade-off - benefits now become opportunity costs
  - Boathouse
  - Costs: pricey, downtown, time, gas, look nicer
  - Benefits: love the food, see the lake, good atmosphere
  - Choice
FEC #4- Incentives Matter
- All economic theory is based on the fact that incentives influence human behavior in a predictable manner.
- Incentive- pushing you to make a choice: any reason you do something
  - Intrinsic v. Extrinsic- intrinsic=inside; extrinsic= you are being influenced by something outside of your own self-interest
  - What are some examples of each?
  - What about incentives that influenced your CBA?
- Types of Incentives
  - Positive incentive- rewards you get, added bonuses, (ex: sign contract and get an added bonus; buy one get one free)
  - Negative incentive- consequences or punishments
  - Consumer incentive- buyers and consumers (most effective is sales); modifying consumer behavior to consume more
  - Producer incentive- produce (business owners)-modify producer behavior so they produce more (moving out to Ooltewah to meet people's needs)
- If incentives change, human behavior will change, but it will also work to an equilibrium (balance)
  - For example: consumers and producers both win when things are on sale: producers get rid of products, and consumers get more product
- Problems with Incentives- people learn how to work the system to get its best benefit; not perfect