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Introduction to Economics

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Economics is a Way of Thinking, a Thought Process

You already know and use some of the economic principles we will discuss

Your informal economic education began when your parents gave you your first dollar to spend

You had to choose the combination of economic goods and services (commodities) to buy, that would give you the greatest satisfaction (utility)

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Common Knowledge in our Economic System:

That all commodities have a price determined by a market (legal or illegal)

Usually price is thought of as the monetary sacrifice that must be made to obtain a commodity

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The monetary price of a commodity

may not be the true or total cost of obtaining the economic good or service

Bag Lunch vs. Buying Lunch Living on Campus vs. Commuting Eating Out vs. Eating at Home

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Introduction to Economics

Definition of economics:

A social science concerned with the way an individual or society CHOOSES to employ limited resources having alternative uses to produce economic goods and services for present and future consumption.

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Let's take this definition apart and analyze it.

Think of economics as being a core area, surrounded by outlying extensions into areas more usually associated with other disciplines.

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Core Area is Considered a SOCIAL SCIENCE

Economics

Livestock Mgmt.

Landscape Tech.

Turf ManagementTurf Management

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Because it Deals with Human Activity.

Economics deals with a limited range of human activity characterized by RATIONAL BEHAVIOR, and the interaction of individuals upon one another through the mechanism known

as a

MARKET.

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Rational Behavior:

An action well suited to achieve specificgoals within the limitations and

capacities of an individual.

You learn from your mistakes, and do not repeat them.

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Limited Resources:

Resources are also called "factors of production" or "inputs."

LIMITED implies the concept of SCARCITY

For all practical purposes, human wants may be regarded as limitless. Do we ever have enough goods and services?

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Scarcity

Scarcity simply means that there is not enough FOP's in the world to create all of the goods and services that people desire at a PRICE = 0.

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Scarcity

The supply of resources available at any particular time, only allow for the production of a small fraction of the goods and services that people desire.

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Factors of Production (Inputs)

ProductionProcess

Inputs Output

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Resources:AKA "factors of production", or "inputs"

LAND CAPITAL LABOR ENTREPRENEURSHIP

(Management)

Property Resources

Human Resources

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LAND All raw materials available in nature,

i.e. land, coal, timber, rivers, air , fish, etc.

– Nonrenewable resources

– Renewable resources

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CAPITAL

Man made aids to the production process. Tools, machinery, and buildings used to produce other goods and services.

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LABOR

All the human physical and mental skills that can be used in the production of goods and services.

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ENTREPRENEURSHIP

Also known as MANAGEMENT.

The ability to organize Production, innovate, and take risks. Ability to collect information, and analyze that information to solve problems or create opportunities.

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What does a entrep. do?

Takes the initiative in combining land, labor, and capital in order to produce a good or service.

Undertakes basic decision-making for the business.

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What does a entrep. do?

Takes risk of losing money or going bankrupt.

Forms a business and introduces new products and techniques of production.

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Owners of resources receive payments

LAND receives RENT CAPITAL receives INTEREST LABOR receives WAGES MANAGEMENT receives PROFIT

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Owners of resources receive payments

LAND receives RENT CAPITAL receives INTEREST LABOR receives WAGES MANAGEMENT receives PROFIT

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Limited resources have alternative uses

CHOICES must be made!!!

How will these scarce resources be used ?

(1) Will we use oil to make gasoline, plastic,

fertilizer etc.

(2) Use fertilizer to raise corn, soybeans,

tobacco, cotton, turf, hostas, tulips etc.

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Limited resources have alternative uses

(3) Use corn to feed people, feed hogs to

produce pork, feed beef cattle to

produce beef, feed dairy cattle to

produce milk.

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HOW DO WE ALLOCATE THESE SCARCE RESOURCES ?

WHAT SHOULD WE PRODUCE ?

HOW MUCH OF EACH GOOD OR SERVICE SHOULD WE PRODUCE ?

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ECONOMICS?

So far we have determined that economics is the study of the allocation of scarce resources to satisfy unlimited human wants.

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Produce economic goods and services for

present and future consumption

Factors of production are used to produce things that people want.

These "things" are known as commodities. Commodities consist of goods and services.

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Goods are Tangible Items that Consist of:

Economic Goods– Consumer Goods

» Durable Goods: last 3 years or longer

» Non-durable Goods: last less than 3 years

– Capital Goods

Free Goods

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Economic Goods

Tangible items in which the quantity demanded by society exceeds the quantity available at a price equal to zero.

Qd > Qs @ P = 0

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Consumer Goods

Are Economic Goods

used directly by consumers to generate satisfaction.

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Capital Goods

Man-made goods used to produce consumer goods.

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Free Goods

Tangible items in which the quantity available exceeds the quantity demanded at a price equal to zero.

Qd < Qs @ P = 0

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Services Are Intangibles Such as:

mowing, custom combining, education, tractor repair, income tax services,landscape planning, hair cuts, etc.

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Production

The act of making goods and providing services.

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Consumption

The act of using goods and services to satisfy needs and wants.

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Present Consumption

Consumption within a short period of time, also referred to as short run consumption.

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Future Consumption

Consumption outside the short period of time

(long run consumption).

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Price:

RATIONS consumption over time given a certain income!!!

Grocery Store Example.

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SUMMARY

Three key words in our definition and discussion?

1. Scarcity

2. Choice

3. Time

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Law of Scarcity

Economic resources are scarce!

There are never enough at any given time to produce all the things that people want at a price = 0.

Scarce resources can be increased, if at all, only through effort and sacrifice.

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Choice

Scarcity forces every economic system, every business, every individual to make choices.

A decision to produce one commodity frequently implies a decision to produce less of another commodity (production possibilities curve).

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Choice

Often, the decision to produce a particular commodity may lead to the decision to completely stop production of another.

In other words, some tradeoffs must be made since we do not have the resources to produce the variety and quantity of

commodities we would like to produce.

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Choice

PRICES assist us in determining which choices to make concerning:

What to produce ?

How much to produce ?

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TimeProduction requires time, consumption

requires time, choice requires time, adjustments to price changes or resource limitations requires time.

Nothing about economics is instantaneous !!!

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Time There is always what we call a LAG in

response to changes, or shocks to the economic system.

One of the functions of PRICE is to ration out resources and commodities over time.

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Time Time itself is scarce. Do we ever have

enough time?

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CONCLUSIONS

Economics is fundamentally concerned with choices or decisions concerning the use of resources (factors of production).

Problems of choice arise when there are alternative ways of achieving a given objective.

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CONCLUSIONS

Economics develops specific criteria which define the conditions for making the best use of society's resources.

We employ these criteria as guide lines for formulating and evaluating decisions.