Economic Way of Thinking

Scarcity The condition that results from society not having enough resources to produce all the things people would like to have.

Scarcity Qualifications 1. Limited in quantity 2. Be desirable 3. Have more than one valuable use

Everything has a cost! Free Puppies! No such thing as a Free Lunch!

People choose for good reasons! Cost and Benefits Different Values = Different Choices

Incentive Matters Rent control in New York Supply and Demand

People create economic systems to influence choices and incentives Market vs Command Economies As rules change incentives and behavior change

People gain from voluntary trade. Makes them better off No benefit = no trade Economics is about trade!

Economic thinking is marginal thinking. Marginal choices involve the effects of additions and subtractions

The value of a good or service is affected by people’s choices. Value is determined by the preferences of buyers and sellers

Economic actions create secondary effects. Rent controls make apartments more affordable to some. Less profitable to build and maintain. (Friends)

The test of a theory is its ability to predict correctly. It the theory correctly predicts the consequences of actions, it is a good theory! Proof is in the pudding!

So what is Economics? Economics is the study of how people satisfy wants with scarce resources

Mom I NEED food! Mom I WANT Pizza! NEED: basic requirement for survival –Food, clothing, shelter WANT: way of expressing a need

There Is No Such Thing As FREE Lunch! Buy one, Get one Free Who pays?

Decisions on how to use our limited resources? WHAT to produce? HOW to produce? FOR WHOM to produce?

WHAT to produce? Military Equipment v. other goods (food clothing housing) Should its limited resources be used for _________? Cannot Please everyone….MUST make a decision on WHAT to produce!

HOW to produce? Mass production –Equipment v. workers –Low v. high production cost –Less expensive = available to the masses

FOR WHOM to Produce? Must be allocated to someone Not enough? –A choice must be made –Who will receive it?

Three questions MUST be answered b/c of limited resources

Unlimited Wants Limited Resources Scarcity Choices WHAT to produce HOW to produce FOR WHOM to produce

Factors of Production Land Capital Labor Entrepreneurs

Land “Gifts of nature” (natural resources) Fixed or limited in supply Good farmland, sandy beaches, oil and minerals Scarcity increases as population grows

Capital Tools, equipment, machinery, and factories used in production of goods and services (capital goods) Financial Capital: money used to buy capital goods Computers in school: used to produce the service of education

Labor People with effort, abilities, and skills –Exclude the group called entrepreneurs –Vary in size –Why would the labor force vary in size?

Entrepreneurs Innovators responsible for change in our economy Risk-taker –Profits –New with existing resources Start new businesses/ new products Initiative that combines resources (land, labor, capital)

Production Factors of production are present = PRODUCTION Creating of goods and services can take place –Schools: Capital goods? Labor? Land? Entrepreneurs?

Gross Domestic Product (GDP) It is the most important measure of the overall economy. It is the overall dollar amount of all goods and services produced within the United States borders in a year. American goods made in other countries are NOT counted (ford plants in Mexico)

GDP Nissan plants in Tennessee DO count toward GDP Secondhand sales do NOT count toward GDP – Used Cars, Garage Sales, Thrift Stores because they have already been counted. Illegal activities such as drug sales, illegal gambling do NOT count.

Scope of Economics Description –GDP: dollar value of all final goods and services produced within a countries boarders –Need to know what the World around looks like Analysis –Why are prices of some items high while others are low? –Why things work and how things happen Explanation –Communication of knowledge to others Prediction –Rise and fall of Income –Make best decision: what is, what tends to be, and what may happen?

Basic Economic Concepts

Goods, Services, and Consumers Economic Products: –Goods and services that are useful, scarce, and transferable to others –Cannot get enough to satisfy ones wants and needs –Command Price

Goods Item that is economically useful or satifies an economic want Consumer Goods: –Final use by individuals Capital Goods: –Manufactured goods used to produce other goods and services Durable Goods: –Any good last three or more years when used on a regular basis

Services Work that is preformed for someone Examples?? Intangible: cannot be touched

Consumers Person who uses goods and services to satisfy wants and needs

Value, Utility, and Wealth Value refers to a worth that can be expressed in dollars and cents

Paradox of Value Contradiction between necessities and value Water v. Diamonds Scarcity is required for value –Is it enough?

Utility The capacity to be useful and provide satisfaction Not fixed or measureable Vary from person to person i.e.: One person may enjoy a rock/R&B concert, another may not Value = Scarce + Utility Water v. Diamonds

Wealth Accumulation of those products that are tangible, scarce, useful, and transferable Nations wealth: includes natural resources. Factories, houses, etc Services are not counted as wealth (intangible) The Wealth of a Nation, 1776 by Adam Smith (read page 18 profiles in economics)

The Circular Flow of Economics Market Factor Markets Product Markets

Markets: location or other mechanism that allows buyers and sellers to exchange a certain economic product Factor Markets: Where productive resources are bought and sold. (sell your labor for wages) Product Markets: producers sell their goods and services to consumers ( you use to money you made to buy products) The Circular Flow of Economics

Productivity of Economic Growth Economic Growth: –nations OUTPUT of goods and services increases over time –Circular flow chart: Means more factors of production (goods/services) flowing in once direction Productivity: –Measure of the amount of output produced by a given amount of inputs in a time period The most efficient capital goods/most fertile land

Division of Labor Individual workers do fewer task Become proficient in a task v. less proficient in hundreds of task

Specialization FOP can perform tasks that they can do more efficiently than others –Industry robots –Regional specialization: GA = Peaches/Peanuts

Henry Ford Assembly line –Cut time necessary to make a car –Cut the price of the car

Investing and Human Capital Human Capital: sum of the skills, abilities, health, and motivation of people –Gov’t can invest: Education and health care – Businesses: training/programs to improve motivation –Individuals: invest in their education Invest: Human+Physical Capital leads to an increase in production = ECONOMIC Growth

Economic interdependence We rely and others and others rely on us to provide goods and services that we consume –Cars are built in the US but parts may be made in another country Labor disputes: –Basketball affects people who park cars, sell tickets, serve food at the games, see apparel, etc –Drought/hurricane/flooding in one country can effect price of goods in another

Bib. Economics: Principles and Practices Chapter 1 Gary E. Clayton, Ph.D. McGraw, Glencoe 2005