Economics is the study of how we make the most of what we have.

 Economics is the study of how people choose to use their scarce resources in an attempt to satisfy unlimited wants

Scarcity  A resource is scarce if the amount people desire exceeds the amount that is available. Without scarcity there would be no economic problem

Choice  Choice implies tradeoffs: the Opportunity Cost of any choice (decision) is the value of the best alternative you gave up.

"Make the most" (maximize value)Weigh costs vs benefits 

Opportunity Cost.  The Opportunity Cost of any decision is the value of the best alternative you gave up

Benefits and prices. One way to estimate benefits is to observe (or estimate) what people are willing to pay.

One-time (lumpy) choices

Adjustments--Marginal Analysis

Income(A flow)Value of what we produce, or the value of what we earn from supplying resources

Wealth (A stock)The value of our resources. The value of our resources are determined by their ability to produce income.

A stock has no time dimension—it’s just an amount.  E.g., the money in your bank account or the number of people in this room.

A flow has a time dimension—it’s an amount per period of time.  E.g., speed (mph) or GDP ($/yr).

People face tradeoffs.

The cost of something is what you give up to get it.

Rational people think at the margin.

People respond to incentives.

Transformation

Production

Transportation

Exchange

The set of all individuals, institutions, mechanisms, practices, interactions, and behaviors by which we use our scarce resources to satisfy our needs and wants.

Households

Firms

Government

Rest of the World

Individuals or households maximize "utility" by

Making career choices

Investing in Human capital (education, training)

Working

Spending, consuming,

Saving

Firms maximize profit or shareholder wealth

Governments represent society and may try to maximize social welfare. 

Trade can make everyone better off.

Markets are usually a good way to organize economic activity.

Governments can sometimes improve economic outcomes.

The standard of living depends on a country’s production.

Prices rise when the government prints too much money.

Society faces a short-run tradeoff between inflation and unemployment.