Chp. 1: What Is Economics?

The study of economics begins with the idea that people cannot have everything that they need or want.

Why must people make such choices? ECONOMICS The study of how people make choices – utilizing limited resources – to satisfy their needs and wants Why must people make such choices? The reason is SCARCITY.

People always have to make choices about how to meet their needs and wants. A need is something we must have in order to survive – food and water, clothing, and shelter. A want is something we would like to have but that isn’t necessary for our survival – things like a car, that new CD, or a cell phone.

Obviously, our needs and wants are unlimited. However, the resources at our disposal to meet our needs and wants are limited. This combination of limited resources but unlimited needs and wants is called scarcity, and it is the basic problem of economics.

The things we want are goods and services. Goods are objects, like cars and clothes, shoes and shirts. Services are actions or activities that one person performs for another – tutoring, doctor’s visits, haircuts, etc..

All of the goods and services we produce are scarce. Scarcity implies limited quantities of resources to meet unlimited wants. Bill Gates may be able to buy many classic cars, but, sooner or later, he’ll reach his limit.

At its core, economics is about solving the problem of scarcity.

Critical Thinking Why might an economist look at hundreds of cars moving along an assembly line and say, “There is an example of scarcity”? MATERIALS USED TO MAKE THE CARS ARE IN LIMITED SUPPLY ONLY SO MANY WORKERS ARE AVAILABLE TO ASSEMBLE CARS THE LAND THAT THE FACTORY IS ON IS A PART OF A FIXED AMOUNT OF LAND ON EARTH

Don’t confuse scarcity with shortage… A shortage occurs when a good or a service is unavailable, when people have trouble supplying goods and services at current prices.

…the failed economic policies of government Shortages may be caused by… …wars …natural disasters …the failed economic policies of government

Some shortages end quickly, when the circumstances that caused them no longer exist. Others last a long time.

Economists call the resources used to make goods and services the FACTORS OF PRODUCTION.

Economists generally recognize 3 types of factors of production… LAND – the natural resources, like forests, water, coal, and iron

(2) LABOR – human energy used to produce a good or service – may be physical energy or mental (intellectual) energy

(exs. : buildings, tools, machines, etc.) (3) CAPITAL – a human-made resource used to produce another good or service Objects made by people that are used to produce other goods and services are called physical capital (exs. : buildings, tools, machines, etc.) The knowledge and skills people have learned and then put to use creating goods and services are called human capital.

Some economists recognize a fourth factor of production… ENTREPRENEURS People who combine land, labor, and capital to invent a new product, create a new business, or come up with a new way of doing something.

Entrepreneurs… …take risks to develop original ideas …start businesses …create new industries …fuel economic growth …create jobs for others

Entrepreneurs are… Risk takers Visionaries Leaders The backbone of the American economy

Some important American entrepreneurs: Thomas Alva Edison (The light bulb, the electrical grid, motion picture cameras and projectors, recorded sound on a disc, and a lot more…) Charles Darrow (The most popular board game in the world – Monopoly!) King Gillette (The safety razor) Wally Amos (“Famous Amos” cookies)

Ray Kroc (McDonalds) Robert Pittman (MTV, AOL) Truett Cathy (Chick-fil-A) Margaret Rudkin (First great female entrepreneur in the U.S. – Pepperidge Farm bakeries)

(Publisher of “Jet” and “Ebony” magazines, founder of BET network) John Johnson (Publisher of “Jet” and “Ebony” magazines, founder of BET network) Wilson Greatbatch (The artificial pacemaker)

Mary Kay Ash (Cosmetics) Paula Deen (“The Lady and Sons restaurant – Savannah, Ga.; Food Network star; publisher)

influential book critic, magazine publisher) Oprah Winfrey (Television host, media mogul, philanthropist, Academy Award – nominated actress, influential book critic, magazine publisher)

(President and Founder of WeCareMD Dr. Mary Dailey-Smith (President and Founder of WeCareMD in Hiram, Georgia)

The entrepreneur takes the land, labor, and capital and creates something new!

Which factor of production is represented by each of the following? Decision Making Which factor of production is represented by each of the following? An office building Capital (Physical) (B) An assembly line worker Labor (C) A tree used to make paper Land (D) Unused soil (E) An artist (F) A student Capital (Human)

Opportunity Costs Every day of our lives are filled with choices, from the moment we open our eyes in the morning until the moment we close them again in sleep at night.

Every choice that we make involves a trade-off – the selection of one product, or one item, or one course of action over another. Individuals, businesses, and governments all face trade-offs.

A student who chooses to spend more time studying Economics tonight will have less time to spend with her friends (time being a limited resource for all of us.)

A business that uses all of its factories and all of its money to build tables cannot also build cars at the same time (factories and money being limited resources).

A country (government) that decides to produce more military goods has fewer resources to use to try to find a cure for AIDS (the famous “guns or butter” trade-off).

A person who chooses one alternative gives up other alternatives. That is a trade-off. The value of the most desirable alternative given up is called the opportunity cost.

For example… Suppose you have to choose between sleeping late and getting up early to study for a test. The opportunity cost of more study time is less sleep. The opportunity cost of more sleep is less study time.

Decisions also involve thinking at the margin. This means deciding about adding or subtracting one unit of a resource, such as one hour of sleep. In the previous example, the decision was between sleeping late or studying. But you could also choose to sleep an hour late, then wake up to study. To make a decision “at the margin,” you would compare the opportunity cost and benefit of each extra hour of studying.

Decision Making At The Margin Alternatives Benefit Opportunity Cost 1st hour extra study “C’ grade 1 hour of sleep 2nd hour extra study “B” grade 2 hours of sleep 3rd hour extra study “A” grade 3 hours of sleep

Suppose you can save $50 by buying your car in a different city. Problem Solving Suppose you can save $50 by buying your car in a different city. If the trip involves only $10 in gasoline, is the trip worthwhile? Why or why not?

Decision Making Determine an opportunity cost for each of the following… (A) Eating pizza in the Dining Hall (B) Going to see a movie Tuesday night (C) Going to see a movie on Saturday (D) Watching television

Production Possibilities Curves Economists use graphs called production possibilities curves to show alternative ways of using a country’s resources.

For example, an economist might want to examine the production of shoes and watermelons (See Figure 1.5, pg.15) A production possibilities curve can show how the number of shoes produced affected the number of watermelons grown. As the example provided shows, as the number of watermelons produced is increased, the number of shoes produced will decrease.

This happens because land is a limited resource and more land for watermelon farms means less land for shoe factories. Similarly, as more shoes are produced less resources are available to grow watermelons.

Efficiency means an economy is using resources in such a way as to maximize the production of goods and services. In the watermelon-shoes example, efficiency would mean that the most watermelons and shoes possible are being produced.

The line on the curve that shows the maximum possible production of both items illustrated is called the production possibilities frontier. If factory workers and farmers lost their jobs, fewer shoes and watermelons would be produced – in this case the economy would suffer from underutilization (using fewer resources than it is capable of using). Bottom line: a country’s resources are always changing.

In the future, resources may increase, causing the economy to grow. If more labor becomes available, there will be more workers to produce more goods. Improvements in technology, or know-how, will also help the economy grow. This growth would be shown by a shift to the right of the production possibilities curve.