Presentation on theme: "Modules 7 – 8 Adam Smith and Economics. Economics Definition & History Economics is the social science that studies the a) production, b) distribution,"— Presentation transcript:
Modules 7 – 8 Adam Smith and Economics
Economics Definition & History Economics is the social science that studies the a) production, b) distribution, and c) consumption of goods and services. Goods are tangible objects that an individual may want or need. Services, on the other hand, are nontangible. They are actions people value.
Production Production refers to how goods and services are generated. For example, production could describe how farmers grow crops and raise livestock, how factory workers assemble machines, how barbers give haircuts, or how chefs prepare meals.
"Place" or Product Distribution Place or product distribution is a step in the production process where goods and services are transferred to those who use them. Distribution places will vary across products and industries. In earlier times, producers usually did not make products until customers ordered them. For example, a blacksmith would not make a tool until a customer ordered it. Today, you can simply go to a store and buy the tool directly off the shelf. As long as that tool is in stock, it will be on the shelf whether you need it or not. Likewise, manufactured goods such as clothing, tools, and other products are made in large quantities long before any individual consumer has thought of buying them.
Consumption Consumption is the process by which people use goods or services to satisfy their wants and needs.
2 Main Branches of Economics Microeconomics is the study of how individuals, households, and businesses make choices about the production, allocation, and consumption of scarce resources. I – In particular, it focuses on how an individual or firm makes a decision given limited resources. One of the most important microeconomics concepts is how the interaction between buyers and sellers affects prices and the availability of a good.
Macroeconomics Macroeconomics, on the other hand, is the study of the economy as a whole. It includes national, regional, or global economies. As opposed to studying specific decision-making factors, macroeconomics examines total output, total employment, total income, aggregate expenditures, and general price levels to analyze various economic problems.
Adam Smith The Father of Economics Famous for his book “The Wealth of Nations” Attempted to explain why some countries are richer than others.
Mercantilism The economic system of the major trading nations during the 16th, 17th, and 18th centuries, based on the premise that national wealth and power are best served by increasing exports and collecting precious metals in return.
Factors of Production The resources used to produce goods and services—in other words, the inputs or tools needed to produce goods and services. – Natural Resources – Human Resources – Capital Resources – Entrepreneur’s
Land Land includes not only the site of production but also all the natural resources. For example, it includes naturally occurring resources like water, air, soil, minerals, flora and fauna, which are used to create products. Land that is owned can be used by the owners as they see fit. This includes allowing someone else to use the land in order to produce products in exchange for a payment to the landowner, which is called rent. Rent also can be applied to property, where the owner of a building can allow others to use the building space in exchange for payment.
Labor Labor represents the human effort used in the production process. It also includes technical and marketing expertise—for example, farmers hired by a landowner, workers hired by a factory owner, chefs hired by a restaurant owner, engineers hired by a computer company, or doctors and nurses hired by a hospital are all called laborers. Their payment or income is called a wage.
Capital Resources Refers to already-produced durable goods used to produce other goods or services. There are two types of capital resources: – Physical capital refers to man-made goods, such as tools, machines, and buildings. – Human capital refers to the skills and knowledge a person has acquired through experience and/or education.
Capital Resources Unlike land, capital must be produced by human labor before it can become a factor of production.
Entrepreneurship Adam Smith recognized the key role of entrepreneurship. Entrepreneurs accept the risk of organizing resources to produce goods and services, and they expect to earn profits. Entrepreneurs earn profits when buyers purchase the products they sell at prices higher than the costs of production. Entrepreneurs incur losses when buyers do not purchase the products they sell at prices high enough to cover the costs of production. Entrepreneurs are motivated to invest due to capital gain, which is the difference between what you pay for an investment and how much you sell it for. For instance, if you buy a product at $10 and sell it for $15, it results in a $5 capital gain.
The Invisible Hand Adam Smith believed that people, acting in their own self-interests, would work hard and produce what consumers wanted, as if directed by an invisible hand. The invisible hand is still a commonly used metaphor to describe the self-regulating nature of the marketplace. Smith claimed that by pursuing their own interests, individuals frequently provide unintentional benefits to society more effectively than when they try to do so intentionally.
Division of Labor Division of labor refers to the specialization of work based on specific activities—breaking big tasks into many tiny components. These specialized workers become extremely skilled as they repeat the activities over and over. As a result, according to Smith, the division of labor largely increases efficiency.
Trade Smith also believed that trade among countries was beneficial. He stated: "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." 1