Unit 1 Objectives After studying this unit, students will be able to: Define economics and its fundamental principles Differentiate between traditional, command, market, & mixed economies Identify the major types of business organizations in the United States 11/23/2018

Section 1 Scarcity and the Science of Economics What is Economics? Section 1 Scarcity and the Science of Economics The study of economics helps us in many ways, especially in our roles as individuals as members of our communities, and as global citizens. 11/23/2018

Fundamental Economic Problem Scarcity A condition that results from society not having enough resources to produce all the things people would like to have 11/23/2018

Economics Study of how people try to satisfy unlimited wants through the use of scarce resources 11/23/2018

Needs & Wants Needs – basic requirements for survival (food, clothing, & shelter) Wants- something we would like to have but is not necessary for survival 11/23/2018

TINSTAAFL There is no such thing as a free lunch Resources are limited Everything we do has a cost…someone has to pay #3 even if it seems like we are getting something “for free” I.E. Even if someone gives you a free meal you have to give up your time. Another example, if you receive a coupon for a free meal, the business has to pay for the resources that went into the meal 11/23/2018

Three Basic Questions WHAT to Produce HOW to Produce For WHOM to Produce First…because we live in a world of relatively scarce resources, we have to make careful economic choices about the way we use these resources I.e. should a society direct most of its resources to the production of military equipment or to other items such as consumer goods? Should factory owners use automated production methods that require more machines and fewer workers, or vice versa Who will receive the things produced? 11/23/2018

Factors of Production Productive resources that make up the following four categories: Land Labor Capital Entrepreneurs Refers to natural resources or other “gifts of nature” not created by human effort A human resource…people with all their efforts, abilities, and skills except for entrepreneurs Tools, equipment, & factories used in the production of goods & services Risk-taking individual in search of profits…these people are innovative and responsible for much of the change in our economy 11/23/2018

Gross Domestic Product (GDP) Dollar value of all final goods & services produced within a country’s borders during a one-year period The most common measure of a country’s total output A key measure of a nation’s economic health Last…Economics also describes jobs, prices, trade, taxes, & government spending 11/23/2018

Basic Economic Concepts Section 2 Economics is concerned with economic products—goods & services that are useful, relatively scarce, and transferable to others. Economic products help us satisfy our wants needs. Because they are both scarce & useful, they command a price. 11/23/2018

Goods Tangible economic product that is useful, relatively scarce, and transferable to others Capital Goods Consumer Goods 2. When manufactured goods are used to produce other goods & services, they are called capital goods (i.e. an oven in a bakery) 3. Goods intended for final use by individuals 11/23/2018

Durable vs. Nondurable Goods A good that lasts at least three years when used regularly Nondurable An item that wears out or lasts fewer than three years when used on a regular basis I.e. cars i.e. food, clothing, etc. 11/23/2018

Service Work or labor performed for someone i.e. haircuts, doctors, lawyers, etc. 11/23/2018

Value Monetary worth of a good or service as determined by the market Expressed in dollars & cents 11/23/2018

Paradox of Value Apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item Economists knew that scarcity was necessary for something to have value 11/23/2018

Utility Ability or capacity of a good to be useful & give satisfaction to someone Utility of a good varies from person to person 11/23/2018

Value For something to have monetary value, it must be scarce and have utility Diamond water paradox 2. Diamonds are scarce & have utility while water has utility but is not scarce 11/23/2018

Wealth Sum of goods that are scarce, useful, and transferable from one person to another 11/23/2018

Circular Flow of Economic Activity Market meeting place that allows buyers & sellers to come together Factor (resource) Market Market where resources are bought & sold Product Market Market where products are bought & sold Markets may be local, national, or global and they can even exist over the Internet This is where entrepreneurs hire labor for wages or salaries…acquire land in return for rent After individuals receive their income from the resources they sell in a factor market, they spend it in product markets. These are markets where producers sell their goods & services. The wages that individuals receive from businesses in the resource markets returns to businesses in the product market. Businesses use this money to produce more g&s 11/23/2018

Economic Growth Occurs when a nation’s total output of products increases over time Productivity Measure of the amount of output produced with a given amount of resources 11/23/2018

Human capital Sum of people’s skills, abilities, health, knowledge & motivation Provides a major contribution to productivity Government can invest in human capital by providing education & health care. Businesses can invest in training for their workers. 11/23/2018

Division of labor Division of work into separate tasks performed by different workers Specialization Assignment of tasks to the workers that can perform them more efficiently When a worker performs a task over & over, they obviously become good at it which improves productivity. 2. Division of labor makes specialization possible. 11/23/2018

Economic interdependence We rely on each other to provide most of the products that we consume Events in one part of the world have a dramatic impact elsewhere 11/23/2018

Economic Choices & Decision Making Section 3 11/23/2018

Trade-Offs Alternative that is available whenever a choice is made Decision making grid First…There are alternatives and costs to everything we do. In a world where “there is no such thing as a free lunch,” it pays to examine these concepts closely. 11/23/2018

Opportunity Cost Cost of the next-best alternative use of money, time, or resources when making a choice 11/23/2018

Production Possibilities Frontier (Figure 1.6 p. 21) Diagram representing the maximum combinations of products an economy can produce when all resources are fully employed Identify on graph Full Employment Cost of idle resources Opportunity cost Economic growth Figure 1.6 page 21 The country will have to settle on a single-combination such as point a, b, or any other point on or inside the curve, because its reosurces are limited Look at figures 1.7 & 1.8 to show opportunity cost & economic growth respectively 11/23/2018

Cost-Benefit Analysis Way of thinking about a choice that compares the cost of an action to its benefits 11/23/2018

Free Enterprise Economy Market economy in which privately owned businesses have the freedom to operate for profit with limited government intervention 11/23/2018

Standard of Living Quality of life based on ownership of necessities and luxuries that make life easier 11/23/2018