ECONOMICS : CHAPTER 1 – WHAT IS ECONOMICS? ECONOMICS: choices How do people satisfy their unlimited wants with limited resources

not enough productive resources to satisfy unlimited wants ECONOMIC PROBLEM SCARCITY: not enough productive resources to satisfy unlimited wants WITH NO SCARCITY THERE WOULD BE NO ECONOMIC PROBLEM

PRODUCTIVE RESOURCES The inputs that produce goods and services ALSO KNOWN AS FACTORS OF PRODUCTION, INPUTS, RESOURCES THREE CATEGORIES

HUMAN RESOURCES Human efforts (mental and physical) used to produces goods and services. Labor: most important human resource Comes from human resource: time Sell time for wage What else could you do with your time?

HUMAN RESOURCES, cont. Entrepreneur: specific human resource A person who tries to earn a profit by providing new goods and/or services. Profit = Revenue from sales – Cost of production Assumes risk of business success or failure

NATURAL RESOURCES “Gifts of nature” TWO CATEGORIES LAND FORESTS MINERALS OIL RESERVES BODIES OF WATER ANIMALS TWO CATEGORIES

RENEWABLE RESOURCES Can draw on indefinitely TIMBER -- FORESTS AIR -- GROUNDWATER RIVERS -- GRASSLANDS FISH --AGRICULTURAL SOIL GAME -- LIVESTOCK

EXHAUSTIBLE RESOURCES RUN OUT –LIMITED SUPPLY OIL COAL MOST MINERALS

CAPITAL RESOURCES ALSO CALLED: CAPITAL GOODS All human creations used to produces goods and services. FACTORIES -- TRUCKS MACHINES -- TOOLS BUILDINGS -- AIRPORTS HIGHWAYS CLASSROOM, TAXI CAB, TRACTOR

GOODS TANGIBLE Any item you can see, feel, touch Requires scarce resources to produce Satisfies human wants.

SERVICES INTANGIBLE Not physical Uses scarce resources to produce and satisfy wants and needs

TINSTAAFL THERE IS NO SUCH THING AS A FREE LUNCH ALL GOODS AND SERVICES INVOLVE COST TO SOMEONE

ECONOMIC THEORY Makes Predictions about the real world. Simplifies the problem Simplifies assumptions: other-thing-constant, behavioral assumptions, Rational Self-Interest: You make choices that you think are best for you. You still have concern for others. Your interest is first.

Theory, cont. Normative v. Positive statements Normative: opinion: Your grade should be pretty good or You may fail the class Positive: reality: Your grade is 98% or Your grade is 50%

MARGINAL ANALYSIS Marginal: incremental: change in the status quo “A rational decision maker will change the status quo as long as the expected marginal benefit from the change exceeds the expected marginal cost.” Is it worth it

Market Economics MICROECONOMICS Focus on economic behavior in a specific market What factors influence individual economic choices.

NATIONAL ECONOMICS MACROECONOMICS Focus on the performance of the market as a whole.

MARKETS: How buyers and sellers exchange goods and services PARTICIPANTS Households: most important. Demand the goods and services provided Firms Governments The rest of the world demand resources households supply and use them to supply goods and services.

CIRCULAR-FLOW MODEL How resources, products, income, and revenue flows Resource market Product market

Opportunity Cost Value of the next best choice you gave up Not all choices just the next best. Only individual can decide Varies depending on choices

Calculating OC Not all choices turn out to be the best Time Ignore sunk cost: a cost you have incurred and can’t get back