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PRINCIPLES and APPLICATIONS

of ECONOMICS
6e

PowerPoint Slides prepared by:


Andreea CHIRITESCU
Eastern Illinois University

Marc Lieberman & Robert E. Hall


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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CHAPTER

What Is Economics?

PowerPoint Slides
PowerPoint Slides prepared
prepared by:
by:
Andreea CHIRITESCU
Andreea CHIRITESCU
Eastern Illinois
Eastern Illinois University
University
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Scarcity and Individual Choice
• Economics
– Study of choice under conditions of
scarcity
• Scarcity
– A situation in which the amount of
something available
– Is insufficient to satisfy the desire for it

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Scarcity and Individual Choice
• Scarcity of time
– Limited number of hours in each day
• Scarcity of spending power
– Limited spending power
• Because of scarcity
– We have to make choices

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Scarcity and Individual Choice
• Opportunity cost
– What is given up when taking an action or
making a choice
– What we must forego when we make that
choice
• When the alternatives to a choice are
mutually exclusive
– Only the next best choice is used to
determine the opportunity cost of the
choice
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Scarcity and Individual Choice
• The opportunity cost of college
– Opportunity cost of attending college for
an academic year
– Explicit costs
• Tuition, fees, books, supplies
– Implicit costs
• Forgone income

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Table 1
Average out-of-pocket cost of a year of college, 2010–2011

Source: Trends in College Pricing, 2010, The College Board, New York, NY.
Notes: Averages are enrollment-weighted by institution to reflect the average experience among
students across the United States. Average tuition and fees at public institutions are for in-state
residents only. Room and board charges are for students living on campus at four-year
institutions and off-campus (but not with parents) at two-year institutions. Four-year private
includes nonprofit only.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7
Scarcity and Individual Choice
• Explicit cost
– The dollars sacrificed – and actually paid
out – for a choice
• Implicit cost
– The value of something sacrificed when no
direct payment is made
• The opportunity cost of a choice
– Explicit costs
– Implicit costs
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Table 2
Sample opportunity cost calculation for in-state public university

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Scarcity and Individual Choice
• Is college the right choice?
– Costs
• May be lower – scholarship
• Hate college
– Benefits
• Financial – higher earnings
• Enjoy college
• Time is money

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Scarcity and Individual Choice
• Society
– Goals:
• High standard of living for our citizens
• Clean air
• Safe streets
• Good schools, etc.
– The problem: scarcity of resources

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The Four Resources
1. Labor
– Time human beings spend producing
goods and services
2. Capital
– A long-lasting tool that is used to produce
other goods
– Physical capital
– Human capital

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The Four Resources
3. Land
– Physical space on which production takes
place
– And the natural resources that come with it
4. Entrepreneurship
– Ability and willingness to combine the
other resources into a productive
enterprise

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The World of Economics
• Microeconomics
– Behavior of individual households, firms,
and governments
• Choices they make
• Their interaction in specific markets.
– Greek word mikros, meaning “small”
• Macroeconomics
– Behavior of the overall economy
– Greek word makros, or “large”

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The World of Economics
• Positive economics
– The study of how the economy works
• Normative economics
– The practice of recommending policies to
solve economic problems
• Every normative analysis
– Based on an underlying positive analysis

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Why Study Economics?
• To understand the world better
– Global and catastrophic events
• Wars, famines, epidemics, and depressions
– Local and personal events
• Salary, rent
• To achieve social change
– Understand the origins of social problems
– Explain why previous efforts to solve them
haven’t succeeded
– Design new, more effective solutions
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Why Study Economics?
• To help prepare for other careers
– Business, politics, international relations,
law, medicine, engineering, psychology
• To become an economist
– Universities and banks
– Manufacturing companies
– Government agencies
– International organizations
– The media and nonprofit organizations
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