What is Economics?

Scarcity and the Science of Economics Section 1

TINSTAAFL “There is no such thing as a free lunch.” The more a business gives away as “free” the more it charges for the items it produces and sells In the end someone always pays

Fundamental Economic Problem Scarcity- condition that arises because society does not have enough resources to produce all things that society would like to have. An increase in income can not solve this problem b/c if more money is in circulation it becomes useless Scarcity is not because a shortage of money but because of a shortage of resources.

Factors of Production Provide the means for society to produce and distribute its goods and services Land “gifts of nature” natural resources not created by human effort. Limited Supply Capital The tools, equipment, and factories used in the production of goods and services Financial Capital- money used to buy tools and equipment The result of production Labor – people w/ their effort, ability, and skills Entrepreneurs – risk taker in search of profits The driving force of American economy because they start new businesses and bring new products to the market

Three Basic Question What to Produce How to Produce Society can not have everything society wants so it must decide what to produce. How to Produce What methods (provide more jobs, quicker & cheaper) For Whom to Produce Who will receive the existing supply? * Different societies respond to these in different ways

Economics The study of human efforts to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources.

The Scope of Economics Description – (of economic activity) who gets what. Unemployment, inflation, trade, labor, gov’t spending Analysis- How and Why Explanation – explains the how and why to others Prediction- anticipating likely consequences of different courses of actions

Section 2

Trade-Offs Because people cannot have everything they want. They face trade-offs, or alternative choices, when spending their income or time Trade-offs are present whenever choices are made and are in the form of opportunities given up when one action is chosen instead of the other To help make a decision a decision making grid can be used. (pg 15)

Opportunity Cost Opportunity Cost- Cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Economists use opportunity cost instead of cost in terms of dollars

Production Possibilities Frontier Opportunity cost is shown on a production possibilities frontier Diagram representing various combinations of goods and or services an economy can produce when all production resources are fully employed.

Needs and wants Section 3

Needs vs. Wants Need- Basic requirement of survival Want- Means of expressing a need The range of things represented by the term want is much broader than that represented by the term need

Free Product- they are so plentiful that no one could possibly own them and a price can not be put on them Sunshine air Economic Goods- goods and services that are useful, relatively scarce, and are transferable to others. Because they are scarce there is not enough to fill all wants… therefore they command a price.

Goods Good- tangible commodity Consumer good- intended for final use by individuals Capital Goods- manufactured goods used to produce other goods Durable Good- lasts 3 years or more Non-Durable- good that last less than three Years

Services Work performed for someone Haircut, home repairs, doctors, lawyers Service is something that can not be felt or touched

Consumers People who use goods and services to satisfy wants and needs Consumption- the process of using up goods and services in order to satisfy wants and needs. Conspicuous Consumption- use of goods and services to impress others Expensive jewelry or cars Designer brands

Value Value refers to something that has a worth that can be expressed in value and cents Value is determined by the price someone would pay for the item Paradox of value- things like water are essential to life yet have little value and diamonds are not essential but have a much higher value This is due to scarcity In order for something to have value it must be somewhat scarce

Utility Utility- the capacity to be useful to someone The utility ( or usefulness) of a product may vary from person to person depending on their needs and interests For something to have value, it must be scarce and have utility This is the solution of the paradox of value

Wealth Wealth is the sum of those economic products that are tangible, scarce, useful, and transferable from one person to another. Services do not count as wealth because it is difficult to measure the value of services accurately A countries total wealth us the stockpile of useful, scarce, transferable, and tangible things in existence at a given time.

Productivity Production- the process of creating goods and services. Productivity- efficient use of productive resources Goes up whenever more output can be produced with the same amount of input Also goes up if the same output can be produced w/ less input Productivity is usually discussed in terms of labor but it applies to all factors of production

Specialization of Labor Increased productivity often occur when people specialize means that productive inputs do whatever task they are able to do best It is also known as division of labor Takes place when workers perform fewer tasks more frequently

Human Capital Human Capital- the sum of skills, abilities, health, and motivation of people Productivity tends to increase when firms invest in human capital

Economic Interdependence Economic Interdependence- Actions in one part of the country or the world have an economic impact on what happens elsewhere

Circular Flow of Economic Activity Market- is a location or other mechanism that allows buyers and seller to deal readily in a certain economic product Factor markets- the markets were productive resources are bought and sold ( land, money loaned and invested, people earn wages and salaries) Product market- markets where producers offer goods and service for sale Pg 25

Free Enterprise System System where consumers and privately owned businesses, rather than the government, jointly make the majority of the WHAT, HOW, and FOR WHOM decisions.