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All economic questions and problems arise because

human wants exceed the resources available to satisfy
them.

The condition that arises because the available resources
are insufficient to satisfy wants.

Faced with scarcity, we must make Ô
Ô·we must

Ô

 among the available alternatives.

The choices we make depend on the incentives we face.

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The social science that studies the choices that we make
as we cope with ÔÔ and the  Ô 
 that
influence and reconcile our choices.
Two big economic questions:
‡ How choices determine what, how, and for whom
goods and services get produced?
‡ When do choices made in    also
promote 
Ô  ?
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The objects (goods) and actions (services) that people
value and produce to satisfy human wants.
$ goods and services get produced and in what
quantities?
 % are goods and services produced?
|  $  are the various goods and services
produced?
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The choices that are best for the individual who
makes them.
  
The choices that are best for society as a whole.
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Can choices made in self-interest also serve the

social interest?
4 
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1.Globalization and international outsourcing
Globalization and international outsourcing are
in the interest of owners of multinational firms
that profit, but is it in the social interest?
 //
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. The new economy

Makers of computer chip and programs
developed products in their self-interest but did
they develop their products in the social
interest?
3. Disappearing rainforests
When we buy products made with ingredients
from rainforests are we damaging the social
interest?
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´. Water shortages
Are the global water resources managed in the
self-interest or in the social interest?
5. Global warming
The choices we make concerning how to
produce and use energy are made in our self-
interest but do they serve the social interest?
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â. Katrina
The events following Katrina illustrate the tension
between self-interest and social interest.
Without government enforced laws, self-interest
can be carried too far and damage the social
interest.
Price hikes serve the self-interest of producers
and hurt the self-interest of consumers. Do they
serve the social interest?
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ù. Unemployment
Firms hire workers in their self-interest and
people accept jobs in their self-interest but is
the number of jobs available in the social
interest?
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. Social Security Time Bomb

As baby boomers reach retirement age, social
security payments will increase faster than the
taxes used to pay them and the United States
will have to borrow from foreigners.
Someone will have to pay off these debts. Each
voter¶s choice about who will pay is made in the
self-interest but is it in the social interest?
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‡ Rational choice
‡ Cost
‡ Benefit
‡ Margin
‡ Incentives
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A choice that uses the available resources to best
achieve the objective of the person making the choice.
We make rational choices by comparing Ô
 and
 .
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The best thing that you mu give up to get
something·the highest-valued alternative forgone.


' 
A previously incurred and irreversible cost.
A sunk cost is not part of the opportunity cost of a
current choice.
    
 

* 
   

What we must forego when we make that choice
Accurate and complete concept of cost
Used when making or analyzing decisions
Everything you actually sacrifice in making the
choice
The next best choice is used to determine the
opportunity cost of the choice
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Explicit cost
‡ The dollars sacrificed - and actually paid out for a
choice
Implicit cost; e.g. foregone income
‡ The value of something sacrificed when no direct
payment is made

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The sacrifice of time often means sacrifice of money
The money that could have been earned during that
time



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FIGURE X exams;
Hours Physics Geology If spending % 

Studying Score Score studying each, what
would be his
´ 3 opportunity cost of an
1 5 â additional hour
studying physics?
 â 
3 5 9 ANSWER:  points on
his geology exam
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A weapons plant can manufacture

1, more guns or 5 more tanks
yr.
What is the plant¶s opportunity cost of an
extra gun?
1
 of a tank

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uimited resources to produce them
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Society must shift resources away from producing
something else

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The gain or pleasure that something brings.
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A choice that is made by comparing all the relevant
alternatives systematically and incrementally.
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The cost of a one-unit increase in an activity

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What you gain when you get one more unit of something.

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When we take those actions for which marginal benefit
exceeds or equals marginal cost.
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A reward or a penalty·a ³carrot´ or a ³stick´·that
encourages or discourages an action.
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5   : The study of the choices that
individuals and businesses make and the way these
choices interact and are influenced by governments.
5   : The study of the aggregate (or
total) effects on the national economy and the global
economy of the choices that individuals, businesses,
and governments make.
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Economists distinguish between
‡ Positive statements: What 
‡ Normative statements: What
ug  

The task of economic science:
To test positive statements about how the economic
world works and to weed out those that are wrong.
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The central idea that economists use to unscramble
cause and effect is Ô u
4  means ³other things being equal.´
By changing one factor at a time and holding other
relevant factors constant, we are able to investigate the
effects of the factor.
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In the real world, we observe the outcomes of

simultaneous operation of many factors.
To sort of the effects of each factor, economists use
‡ Natural experiments
‡ Statistical investigations
‡ Economic experiments

Natural experiments: A situation that arises in the ordinary

course of economic life in which the one factor of interest
is different and other things are equal.
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A statistical investigation looks for a correlation.

 
The tendency for the values of two variables to move in
a predictable and related way.
An economic experiment puts people in a decision-
making situation and varies the influence of one factor
at a time to discover how they respond.
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