Economics – What is it? 1

Economics—What is it? Social science—why? Because it deals with people and their choices. Social science—why? Because it deals with people and their choices. Definition: Definition: Economics is the study of markets. It looks at ways to use scarce resources to produce goods and services, and then distributes those goods and services to the population. A simpler definition: A simpler definition: Economics is the study of making necessary choices. 2

The Fundamental Economic Problem The fundamental economic problem facing all societies is that of scarcity. The fundamental economic problem facing all societies is that of scarcity. Definition: Definition: Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. 3

The Economic Problem Scarcity exists because human wants are unlimited and resources are finite (limited) Scarcity exists because human wants are unlimited and resources are finite (limited) Finite resources restrict the ability to produce. Finite resources restrict the ability to produce. What are resources? What are resources? 4

Factors of Production Resources are things we need to make other products. They are our FACTORS OF PRODUCTION. Resources are things we need to make other products. They are our FACTORS OF PRODUCTION. Definition: Definition: Production—process of creating goods and services—takes place when all needed factors of production are available. 5

Factors of Production Factors of Production are land, labor and capital. Factors of Production are land, labor and capital. Definition: Definition: Land refers to “gifts of nature,” or natural resources not created by humans. This includes land, forests, mineral deposits, livestock, sunshine, climate, etc. 6

Factors of Production Definition: Definition: Labor is people, their time, skill, efforts, and abilities used to produce a good or service. An example is people’s ability to work. 7

Factors of Production Definition: Definition: Capital is the tools, equipment, machinery, and factories used in the production of goods and services. This includes any equipment used to make something else like a bulldozer, a computer, and even money (known as financial capital). 8

Factors of Production These factors of production must be present for production to begin. These factors of production must be present for production to begin. Definition: Definition: Production is the process of creating goods and services and production will take place only when all needed factors of production are available. 9

Three Basic Questions Because we live in a world of relatively scarce resources, we have to make wise economic choices. Each society must answer these three basic questions to make decisions about the ways our limited resources will be used. Because we live in a world of relatively scarce resources, we have to make wise economic choices. Each society must answer these three basic questions to make decisions about the ways our limited resources will be used. 10

Three Basic Questions WHAT to produce? WHAT to produce? --military equipment or other items such as food, clothing, or housing? HOW to produce? HOW to produce? --mass production methods that require a lot of equipment and few people or should they use less equipment and more workers? 11

Three Basic Questions FOR WHOM to produce? FOR WHOM to produce? --once the society knows what and how it is producing, these goods and services must be allocated to someone. How do they decide who gets what? 12