Chapter One What is Economics?

What is economics?  The social science dealing with the study of how people satisfy unlimited wants using scarce resources.  Studies human behavior.

Fundamental Economic Problem  Scarcity  Human wants are greater than the capacity of available resources to provide for those wants.

Needs vs. Wants  Needs are requirements for survival.  Wants exceed needs or are ways of satisfying needs.

TINSTAAFL  THERE IS NO SUCH THING AS A FREE LUNCH (TINSTAAFL)  There is always a cost for every decision (not always $$$)

Three Basic Economic Questions  WHAT must we produce? (based on need)  HOW should we produce it? (based on resources)  FOR WHOM should we produce? (based on population and other markets)

The Four Factors of Production  Land  Labor  Capital  Entrepreneurship

LAND – society’s limited resources; “gifts of nature”

LABOR – workers; all human effort, mental and physical

CAPITAL – manmade tools that aid in production

ENTREPRENEURSHIP  Risk-takers  Combine three factors of production.  Make production more efficient.  Develop new products and better ways of doing things.

Scope of Economics  DESCRIPTION  What does the world around us look like?  Gross Domestic Product  Unemployment  Tax rates  Etc.

Scope, cont.  ANALYSIS  How things work  Why things happen  Helps us deal with problems that we want to solve.

Scope, cont.  EXPLANATION  Knowledge can be used to solve economic problems.  Share what we learn.  PREDICTION  Advise on future economic activities  Make better decisions

Basic Economic Concepts ESSENTIAL VOCAB  Goods  Useful items; tangible  Services  Work performed for someone else  Consumers  Users of goods and services

Types of Goods  Consumer – for personal use  Example – happy meal  Capital - used for production  Example – hammer, tractor

 Durable – lasts 3+ years.  Ex: appliances, cars  Nondurable – immediately used up Ex: – food,paper

Value, Utility and Wealth

Value  Worth of a good or service as determined by the market  Expressed in dollars and cents  Must be scarce and useful

The Paradox of Value  What is a paradox?  The paradox of value is the contradiction that occurs when essential items have a low economic value, and nonessentials have a high economic value.  AKA the diamond/water paradox

Utility  Capacity to be useful  Ability to provide satisfaction  Usually depends on person.

Wealth  Having goods with value and utility.  DOES NOT INCLUDE SERVICES

The Circular Flow of Economic Activity  Markets – where buyers and sellers trade  Factor Market – where people earn their incomes  Product Market – where people spend their income

The Circular Flow Model

Circular flow review  The whole groups should complete the review the first time.  Allow each group member to complete the review individually.

Productivity and Economic Growth  Productivity – measure of output produced with certain inputs in a given amount of time. (think EFFICIENCY)

 Specialization/division of labor - improves productivity  Human capital – better skills, abilities, health and motivation improves productivity

Economic Growth  High productivity  Can be affected by interdependence

Make a decision  You win a $1000 door prize at the senior meeting. You narrow down your choices of what to do with the money to three : * spend it all right now in a shopping frenzy * save it for college * get ahead on all of your bills Highlight your first choice now. Label the other choices #2 and #3.

Economic Choices and Decision Making  Trade-offs – choices faced when making an decision  Spend, save, pay bills  Opportunity Cost – value of what you give up when you make a choice  If you spend you give up the savings, maybe college  If you save you give up the fun

Production Possibilities Frontier  Model that shows concept of opportunity cost  Possible combinations of output if all resources are being used  Classic example – consumer vs. military goods (guns v. butter). Butter Guns Inefficient Unattainable Full employment of resources

PPF and Economic Growth  Curve shifts outward when there is growth  More products being produced than before  More resources, larger labor force, increased productivity

Why Study Economics?  Makes you better decision-makers.  Helps you understand the world around you.