Chapter 1: Foundation of Economics – 10 Principles of Economics

Chapter 1 Objectives
By the end of this chapter, students should understand

ü That economics is about the allocation of scarce resources

ü That individuals/society face trade-offs.
ü The meaning of opportunity cost.
ü How to use marginal reasoning when making decisions.
ü How incentives affect people’s behavior.
ü Why trade among people or nations can be good for everyone.
ü Why markets are a good, but not perfect, way to allocate resources.
ü What determines some trends in the overall economy.

1 MACROECONOMICS – CH1, PROFESSOR COCCA, BCCC

 Chapter 1: Foundation of Economics – 10 Principles of Economics

What are you going to do to

survive?

Objective 1: Explain and

Name Your Tribe define economics. O2:
Understand trade-offs. O3:
Explain and give an
example of Opportunity
cost.

Background Directions

You decided to take a road (Flight) trip with your college
classmates – Cancun!
News Flash – Your plane has gone down
Nothing is left of the plane
1. Define Economics, Scarcity, and Trade-Offs
(below).
2. Answer: Why is this activity setup as being
stranded on an Island?

Define
Economics:

• Why is decision making important in Economics?

Scarcity:

• Why is scarcity important?

Trade-Offs:

• Why are trade-offs important when making decisions?

Your First Trade-Off o Work on your own since there is scarce

resources.
You face Trade Offs and have to make decisions.
o Work as a team to benefit from everyone’s
Pick one by filling in the circle. contributions.

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 Directions Costs Benefits
1. Next to the blocks
list the benefits and
costs or negatives
of your decision.

Trade-Offs Choice Opportunity Costs:

A situation in which you must choose The Trade-off you feel has The Choice that you gave up.
between or balance two or more the greatest benefit
things that you can’t have both at the
same time Based on your choice, what is your
What has the greatest opportunity cost?
Give Two Examples of trade-offs you
value?
face: 1.
1.
1.

2.
2.
2.

Principle One: People Face Trade-Offs

You face trade-offs all the time and trying to survive.
Trade-Off 1 Directions
1. Choose 5 Items from the list, considering Economics, Scarcity, Trade-offs, and
Opportunity Cost.

Options Choices Opportunity Cost Opportunity Cost

Trade-offs 1st being most important Highest opportunity cost 1st.

TV, Swiss Army Knife, Tarp,

Plastic Bottle, flashlight, duct
tape, book of choice,
newspaper, vodka, metal pot,
antibiotics, flare, mirror, pack
of lighters, sunglasses, surf
board, bathing suit, Gucci
purse, fishing pole, compass,
map, radio.

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Trade-Off 2 Directions
2. Choose 3 activities from the list, considering Economics, Scarcity, Trade-offs, and
Opportunity Cost.

Options Choices Opportunity Cost Opportunity Cost

Trade-offs 1st being the most important Highest opportunity cost 1st.

Gather wood, hunt for animals,

look for stream of fresh water,
build shelter, look for berries,
build raft, signal for potential
rescuers, go fishing, explore the
island, go for a swim, and hang
out on the beach.

United States – Allocation of Scarce Resources

Options Choices (5) Opportunity Cost Opportunity Cost

Trade-offs 1st being most important Highest opportunity cost 1st.

Education, Local Law Enforcement,

Infrastructure (Roads, Bridges,
Rails, etc.), Health Care Coverage,
Curing diseases (Cancer, Heart
Disease), NASA, National Defense,
Retirement for elderly (Social
Security), Domestic Terrorism,
Medical Benefits for the elderly or
poor (Medicare/Medicaid), Border
Security, homeless, Global
warming, energy, add one in.

Economics is all about making decisions to efficiently allocate scarce resources and realizing
that you can’t do everything. Chapter 1 Objectives 1-3

Immunity Challenge
1. __________ The study of how society manages its scarce
resources.
A. Scarcity 2. __________ The limited nature of society’s resources.
B. Economics 3. __________ People face Decisions and they have to make
C. Trade-Offs a choice of one over the other.
D. Opportunity Cost. 4. __________ Anything of value, it can be physical like oil or
E. Resources corn, but also our time and effort.
5. __________ Whatever must be given up to obtain an
item. The choice you didn’t make.

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 Principle 3: Rational People Think at the Margin
Margin: Total
Quantity

Total: Marginal Unit

Marginal
Value/Utility
Utility:

What will you choose? Objective 4

Directions
I am a genie and I come to you on the island and offer you four items.
1. Discuss with your group and pick one of the items.
2. Lists the benefits and costs of that decision.
3. Graph the using marginal analysis – Label everything.

Pick one of the above choices: __________

Why? List Benefits and Costs

1. 1.
2. 2.
3. 3.

Objective 4: Show, explain, and analyze

marginal reasoning. Use marginal reasoning in
the decision making process.

Marginal Change – a small incremental adjustment to a

plan of action. Remember margin means edge. Each
additional unit.

Marginal Analysis
(MB>MC, MB=MC, MC>MB)

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 Value (Utility) 1-10 (Highest)

Spices Gold Chickens Water

Choice 1

Choice 2

Choice 3

Directions
1. Follow along with the lecture and make sure
you fill in all of the detail.

Marginal Analysis

Quantity

Total Benefit

Marginal Benefit

Total Cost

Marginal Cost

Value (1-10)
Study Work
Study vs Work
0 Hour
For the Chapter 1 Test, How many hours are
1 hour
you going to study?
2 hour
3 hour
4 hour

Marginal Analysis

Quantity

Total Benefit

Marginal Benefit

Total Cost

Marginal Cost

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 On Your Own
Options/Trade-Offs: Concert, Beach, Sporting Event, City, National Park, Amusement Park

Value (1-10)
Day Choice Choice
(Marginal Benefit) (Marginal Cost)
1
2
3
4
5
Marginal Analysis

Quantity (Day)

Total Benefit

Marginal Benefit

Total Cost

Marginal Cost

Principle 4: People Respond to Incentives

Directions
1. Take a vote on who will dig the hole. How many people would? ______________________
2. Take a vote on who will sail off in the boat. How many people would? _________________
3. Pick a person to dig a 10 Ft. Hole:______________
4. Pick a person to go off in the boat:_____________

Objective 5: Explain and

analyze incentives.

1. Take a vote: ___________ How many people would? ___________

2. Take a vote: ___________ How many people would? ___________

Desired Outcome Incentive Result

Incentive – something that induces someone to act or changes their behavior based on the
incentive. *Incentives not always positive – Laws (drinking and driving).

7 MACROECONOMICS – CH1, PROFESSOR COCCA, BCCC

 Directions
1. On your own, think of 2 incentives (one for the island and one for modern day issues).
2. Work in a small group or as a class to discuss others incentives. Fill in table below.

Desired Incentive Result

Outcome

Less water • Use less than a quart of water per day and get one day off from work. Less water usage
usage on the • Use more than a quart of water, one day of hard labor
island
Gas- Less • $2,500 cash driving less than 10,000 miles a year. Less gasoline
gasoline • Sales tax of 10% on gasoline. consumption
consumption

Finance – Risk and Reward Economics- Efficient Allocation of Scare Resources

How People Interact

Principle 5: Trade can make everyone better off
Principle 6: Markets are usually a good way to organize economic activity

Objective 6: Explain how trade

makes everyone better off. O7:
How are markets good?

Directions
1. Pick one set of seeds, any – Apple, Tomato, Watermelon, etc. to grow. What seed:__________________________.
2. You have now grown your fruit or vegetable and you have 10 baskets. The other islands (your class) is the
marketplace for fruits and vegetables. The market is open for trading (5-10 minutes). You can trade as many baskets
as you like and it doesn’t have to be a one for one trade, it can be 2 for 1, etc. Record your inventory below.

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 Fruit or Your Island Tribe Tribe Tribe Tribe Tribe Tribe
Vegetable

Directions
1. Make observations about the market place we just created.
a. Did if function well?
b. How does it relate to economics? What economic observations did you see take place?

Observation Why important:

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 Principle 5: Trade can make everyone better off
Covered in Chapter 3
Define Zero Sum Game:
Example:

Principle 6: Markets are usually a good way to organize economic activity

Covered in Chapter 4 – Supply and Demand

Market Failures and Policy Covered throughout the Course

Principle 7: Governments can sometimes improve market outcomes.

Directions
While the free market can have its positives, it’s not perfect, that is where the government plays an important role.
1. Answer the below questions. Do you think the government or rest of society should intervene or should the market
be left alone without any intervention from society or the government?

One Island strikes water, while the other islands strike out.

1. What do you think would happen if the one island

has the only source of fresh water?

Economic Situation Should the government intervene?

Starting a Business
Building a power plant and selling electricity

Music Sharing

Business has smoke stake

Building a home

Objective 8: Explain why markets

are good, but not perfect.

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 1. Property Rights:
2. Intellectual Property Rights:
a.
b.
c.
3. Market Failure:
a.
b.
4. Market Power:
a. Examples

Why should the government play a role in regulating Market Failures?

Immunity Challenge
1. __________ Is something that changes a person’s behavior.
A. Marginal Analysis
2. __________ Can improve markets if there is market failures.
B. Incentives
3. __________ Making decisions based on weighing the marginal
C. Market Economy
benefits and costs of that action.
D. Trade
4. __________ can make everyone better off based on specialization
E. Government
and comparative advantage.
5. __________ An economic system based upon the fundamentals
of private property, freedom, self-interest, and prices.

How the Economy as a Whole Works

Principle 8: A Country’s Standard of Living depends on its ability to produce goods and services.
Trade-Off 2
Can you think of any islands in the world?
1.
2.
3.
4.
How does an island become a nation or city?

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 A. Productivity Immunity Challenge
B. Specialization

C. Efficiency 1. __________ Quality of life.

2. __________ Increasing output and decreasing/constant inputs.
D. Standard of Living
3. __________ Methods to increase productivity.
4. __________ Focusing on a single task and becoming an expert.

Principle 9: Prices rise when the government prints too much money
Directions: Auction
You are on the island, and I am going to auction some items off. You don’t know how many or what items will come up for
Auction – you will need to consider this when making your bids.
1. Your island is given $100 to bid with. The first item up is an all day trip off the island to a nice yacht parked off the
island. Start the bidding at $5.

Money to Bid= Money to Bid=

Final Bid= Final Bid=

Principle 10: Society faces short run trade-offs between inflation and unemployment

Cause and Effect Relationships

Cause Effect Effect Effect
Money Supply Spending-Consumption Prices Employment
Increase
Money Supply
Decrease
Increase in Interest Rates

Decrease in interest rates

Lower gas prices

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 A. Inflation ___________1. The financial ability to buy products and services. The value of
money in terms of what you can buy.

B. Purchasing Power ___________2. The amount of money in circulation.

C. Money Supply _________ 3. A decrease in prices.

D. Deflation __________4. The rate at which the general level of prices for goods and services is
rising, and, subsequently, purchasing power is falling. Central banks attempt to
stop severe inflation, along with severe deflation, in an attempt to keep the
excessive growth of prices to a minimum. Increase in prices.
http://www.investopedia.com/terms/i/inflation.asp#ixzz3iRHl96EK Video.

E. Federal Reserve ___________ 5. Central bank of the US that regulates US monetary system
(including the money supply) and financial system.

Business Cycle
Directions 4 Stages of the business cycle
1. Define the Business Cycle. Business Cycle:
2. Define the 4 stages.
3. Draw the Business Cycle. 1.
4. Label the 4 stages of the business cycle. 2.
5. Label on the business cycle that you drew 3.
various economic activity or indicators that 4.
takes place during the business cycle. Use the
economic items in the table.

Y. Inflation Z. Deflation

A. Increase in money supply B. Decrease in the money supply

C. Increase in employment D. Increase in unemployment

E. Increase in GDP F. Decrease in GDP

G. Increase in Gas Prices H. Wages flat or stagnant

I. Increase sales at Starbucks J. Increased sales at McDonalds

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 Directions
Review
1. Without looking back in your notes or the worksheets, list 10 concepts, ideas, or terms that you learned in this chapter.
2. Pair up with a partner – list items that you don’t have listed.
3. Group of 4. Discuss and list items that you don’t have listed. Discuss as a class.

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 Additional Practice Marginal Analysis

Marginal Analysis of your Choice

Quantity Total Grade Marginal Percentage of Marginal
Hours Benefit lost income Cost
0 25% 0%
1 50% 5%
2 70% 15%
3 80% 30%
4 85% 50%
5 88% 100%

You have to make a choice since you face a trade-off of studying or working
Your initial decision is to study
Above is your grade based on hours studied, and how % of lost income for every hour worked
1. Calculate Marginal Benefit of Studying in the Table above.
2. Calculate the Marginal Cost of Working in the table above.
3. Graph the Marginal Benefit and the Marginal Cost on the graph below.
a. Y axis MB/MC, X axis Quantity.
4. Label on your graph where MB>MC, MB=MC, MC>MB.
5. What quantity and MB/MC would you decide to work based on marginal analysis?
a. What grade does the student want?
b. How much lost income is the student willing to lose?

15 MACROECONOMICS – CH1, PROFESSOR COCCA, BCCC