Chapter 1: What is Economics?

Scarcity and the Science of Economics What is the fundamental economic problem? Scarcity- condition that results from society not having enough resources to produce all the things people would like to have.

Scarcity Are you content with what you have? Do you want more? Do you want something different? Have you ever settled for something even though you wanted something else?

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Economics The study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources. The study of how we use what we have.

Needs and Wants Need- a basic requirement for survival. Includes food, clothing and shelter.

Needs and Wants Want- way of expressing a need. Example: Need: food Want: pizza Because any number of foods will satisfy the need for nourishment, the range of things represented by the term want is much broader than that represented by the term need.

*TINSTAAFL* Everything we do has a cost, even if it seems like it is free. This is due to scarcity. Example: You have a coupon to Five Guys Burgers and Fries. It is a buy one cheeseburger get one free deal. The second cheeseburger is free. Right?

*TINSTAAFL* NO! Someone had to pay the farmer. Someone had to pay the truck driver for delivering it. Someone had to pay the cook for cooking it. Someone had to pay the server for serving it. Then how does a business recover the cost of giving away free food?

*TINSTAAFL* They raise the prices on the items they do sell. The more items they give away for “free” the more they have to raise their prices. There Is No Such Thing As A Free Lunch!

Three Basic Questions WHAT to produce? HOW to produce it? For WHOM to produce?

WHAT to produce? A society cannot have everything its people want, so it must decide WHAT to produce. Military equipment or housing? Food and clothing or infrastructure?

HOW to produce? Use more machinery and less people? More people and less machinery? Does unemployment play a role?

For WHOM to produce? After a society determines WHAT and HOW they must decide WHOM to allocate those goods and services to? Is there enough for everyone? If not, who gets what?

Factors of Production Land Labor Capital Entrepreneurship

Land Includes the “gifts of nature”, or natural resources not created by human effort. (fixed, limited supply) Examples: deserts, fertile fields, mineral deposits, livestock, sunshine, climate.

Labor People with all of their efforts, abilities and skills. Labor is a resource that varies in size over time. Things like population growth, immigration, famine, war and disease can dramatically impact it.

Capital Tools, equipment, machinery and factories used in the production of goods and services. Financial capital- money used to buy the tools and equipment used in production. *Unique because is it the result of production and the tool of production: bull dozer, cash register.

Entrepreneurs Risk taker in search of profits who does something new with existing resources. Innovators. Provides the initiative needed to combine with the other factors of production to create new products and services.

4 Key Elements to the Study of Economics Description Analysis Explanation Prediction

Description Description of economic activity. Examples: GDP (gross domestic product)- dollar value of all of the goods, services and structures produced within a countries border during 1 calendar year. Unemployment Inflation International trade Interaction of business and labor Government spending of taxes. **Leaves the “why” and “how” questions unanswered.

Analysis Why are prices of some items high while others are low? Why do some people earn high incomes? How do taxes affect people’s desire to work and save money? *Important so that we learn how things work which will, in turn, help us deal with problems that we would like to solve.

Explanation After we know WHAT (description), HOW AND WHY (analysis) it is important to communicate this knowledge to others. If we have a common understanding of our economic system, problem solving becomes more productive.

Prediction: Developing an idea of what may happen in the future so that we can shape our policies, laws, regulations, saving habits, spending habits etc., to accommodate for it.

Economic Products Goods Services Useful Relatively scarce Transferable

Goods Item that is economically useful or satisfies and economic want. Examples: iPod Book Car Hat

Consumer Goods/Capital Goods Consumer- intended for final use by individuals. Capital- goods used to produce other goods and services.

Services A work that is performed for someone. Examples: Hair cut Home repairs Concerts Movies

Consumers Person who uses goods and services to satisfy wants and needs. Indulge in consumption. Consumption- the process of using up goods and services.

Value, Utility and Wealth Value refers to a worth that can be expressed in dollars and cents. Why do things have value? Why are values different?

Paradox of Value **The situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value.

Scarcity is required for value!

Paradox of Value (cont.) Water is plentiful is many areas- making it’s value little or none. Diamonds are scarce in many places making their value great. Scarcity by itself is not enough to create value…

Utility For something to be valuable it must have utility. The capacity to be useful and provide satisfaction. Utility is not fixed or measurable. The utility of a good or service may vary from one person to the next.

For something to have value… It must be scarce and have utility.

Water v. Diamonds Diamonds have utility (pretty) and are scarce. Therefore they have a value in monetary terms. Water has utility, but in most places in plentiful. Less value than diamonds.

Wealth Define: Accumulation of those items that are tangible, scarce, useful, and transferable from on person to another. A nation’s wealth is comprised of all items including natural resources, factories, furniture, clothing, books, highways, games, footballs, jewelry, motels, etc..

Wealth Goods are counted as wealth (tangible). Services are not (intangible) . Services are however, valuable!

The Wealth of Nations Author: Adam Smith, 1776 Referred to “wealth” as the ability and skills of a nation’s people. If a country looses all of it’s possessions, people, through their ability and skills, could restore these possessions. If a country’s people are taken away, it’s wealth would deteriorate.

The Circular Flow of Economic Activity Market- a location or other mechanism that allows buyers and sellers to exchange a certain economic product. Markets may be local, regional, national or global.

Factor Markets Individuals earn their income here. Productive resources are bought and sold. Entrepreneurs hire labor. Land is acquired. YOU enter into the factor market whenever you sell your labor to an employer.

Product Markets (page 15) Individuals spend their money in product markets… Markets where producers sell their goods and services to consumers. Money that individuals receive from businesses in the factor market returns to those businesses in the product market.

Productivity and Economic Growth Economic Growth- occurs when a nation’s total output of goods and services increases over time. Many factors are responsible for economic growth, but productivity is the most important one.

Productivity and Economic Growth Productivity- measure of the amount of output produced by a given amount of inputs in a specific period of time. Goes up: when more output can be produced with the same amount of inputs in the same amount of time.

Example: 1 year + X inputs = 500 units of product “A” Next Year: 1 year + X inputs = 510 units of product “A” PRODUCTIVITY WENT UP BY 2%.

Division of Labor Takes place when work is arranged so that the individual workers do fewer tasks than before. Worker who performs several tasks many times every day is more efficient than a worker who performs hundreds of different tasks in the same period.

Specialization When factors of production perform tasks that they can do relatively more efficiently. Best example: Henry Ford

Henry Ford’s Assembly Line

Investing In Human Capital Human Capital- the sum of the skills, abilities, health and motivation of people. Government can invest: provide education, health care Businesses can invest: training and other programs that improve the skill and motivation of their workers. Individuals can invest: getting an education, staying healthy.

Economic Interdependence We rely on others, and others rely on us, to provide goods and services that we consume. Events in one part of the country of world often have a dramatic impact elsewhere.

Trade-Offs and Opportunity Costs There are alternative costs to everything we do. In a TINSTAAFL world, we must understand these concepts.

Trade-Offs Alternative choices that are faced when making an economic decision. Trade-off decisions can be made in a number of different ways. Pg. 20- Decision-Making Grid

Opportunity Costs Cost- does not always have a dollar and cents value. The cost of the next best alternative use of money, time or resources when one choice is made rather than another. College v. Work

Production Possibilities Another way to demonstrate opportunity costs is a production possibilities frontier. Diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed. Pg 23

Cost-Benefit Analysis Way of thinking about a problem that compares the cost of an action to the benefits received.

Standard of Living The quality of life based on the possession of the necessities and luxuries that make life easier.