Chapter 1: What is Economics?

The Economic Problem

▶ Unlimited Wants▶ Need – A Requirement for

Survival▶ Want – Like to have; Not

necessary for survival▶ Scarce Resources

Scarce=Limited=Not Enough

Economics: The study of how people try to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources

What Is Scarcity?

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

The Economic Problem

1

2

3

The Economic Problem● Not everything costs

“money”○ That is not the only

resource that is finite!

● Because we have to make choices, there are issues and we make our judgements based on our values

● What is important and what is less important?

● The government has to do this all of the time!

The Economic Problem

The Economic Problem

Production Possibility Frontiers

▶ Show the different combinations of goods and services that can be produced with a given amount of resources

▶ No ‘ideal’ point on the curve▶ Any point inside the curve – suggests resources are not

being utilised efficiently▶ Any point outside the curve – not attainable with the current

level of resources▶ Useful to demonstrate economic growth and opportunity

cost

Production Possibility FrontiersCapital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Assume a country can produce two types of goods with its resources – capital goods and consumer goods

If it devotes all resources to capital goods it could produce a maximum of Ym.

If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

.B

CY1

X1

Production inside the PPF – e.g. point B means the country is not using all its resources

It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.

PPF as an Economic Model▶ Economic Model – SIMPLIFIED graph, equation, or figure

showing how aspects of the economy work▶ Goal is to reduce complex situations▶ Based on Assumptions (things we take to be true)

STOP

Factors of Production

▶ Resources required to produce what we want.

Land▶ “Gifts of Nature”▶ Resources not created by

Humans

Labor▶ People; including all of

their efforts, abilities and skills

Capital▶ Tools used in the

production of goods and services

▶ Includes equipment, machinery, factories, etc…

Entrepreneurs▶ A risk taker, in search of profits, who does something

new, with existing resources

Scenario – Identify all of the different factors of production▶ Farmer Joe owns 500 acres of land. On this land he

decides to raise to cattle, as well as grow corn. He hires a construction firm to build a barn to store his cattle. He purchases a grain bin to store the corn after Harvest. Every year in April he loads into his tractor to till the soil. He has hired 3 share-croppers to plant the seeds, take care of the fields, and help with harvest. Every October, Joe and his share-croppers load into his combine and harvest the field. Joe’s son, Dale, is in charge of feeding and milking the cattle daily. In December, Joe takes his top cattle to the slaughter house, to provide what the local news paper calls, “The Best Beef in the State.”

▶ Farmer Joe (2) owns 500 acres of land (1). On this land he decides to raise to cattle (1), as well as grow corn (1). He hires a construction firm (2) to build a barn (3) to store his cattle. He purchases a grain bin (3) to store the corn after Harvest. Every year in April, he loads into his tractor (3) to till the soil. He has hired 3 share-croppers (2) to plant the seeds (1), take care of the fields (1), and help with harvest. Every October, Joe and his share-croppers load into his combine and harvest the field. Joe’s son, Dale (2), is in charge of feeding and milking the cattle daily. In December, Joe takes his top cattle to the slaughter house (3), to provide what the local news paper calls, “The Best Beef in the State.”

How is Economics a Social Science?▶ Addresses People’s Behavior in the Market

▶ Market – Where good’s and services are exchanged▶ Good – A Useful, Tangible Item that satisfies a wan▶ Service – Work performed for people

▶ Four Elements of Economics▶ Description – Describe Economic Activity▶ Analysis – Discover how things work and why▶ Explanation – Communication to the Public▶ Prediction – Addresses possible outcomes and prepares for

them

Value, Utility, and Wealth▶ Paradox of Value – Why are some things considered

valuable by some, and not by others?▶ Value – Worth expressed in dollars and cents▶ Utility – the capacity to be useful and provide satisfaction▶ Wealth – the accumulation of products that are tangible,

scarce, useful, and transferable.

Wealth of Nations▶ Adam Smith – “Father of Modern Economics”▶ Invisible Hand of the Market Place

▶ The Market is Self Regulating “no government”▶ …As if guided by an invisible hand▶ Everybody acting in their own interests, benefits society

2 types of Markets▶ Factor Market

▶ Where factors of production are bought and sold▶ Product Market

▶ Where producers sell their goods and services

Productivity▶ Productivity – The measure of the amount of goods and

services produced in a specific period of time with a given amount of resources.▶ Goes up when more is produced with the same resources▶ Goes down when less is produced with the same resources

How do we increase productivity?▶ Human Capital – Sum of people’s skills, ability,

knowledge, and motivation.

▶Turn to your neighbor and come up with three ways to increase productivity through the use of Human Capital

Other ways to increase Productivity▶ Division of Labor – Separate individuals do separate

work▶ Specialization – Performing only those tasks that one

can do better or more efficientlythan others.

Effect of Education on Income

Profiles in Economics Pg. 18▶ Read About Adam Smith

▶ Answer the 2 Examining the Profile questions at the bottom of the page

Trade-offs▶ Alternative Choices

Opportunity Cost▶ Definition – the cost expressed in terms of the next

best alternative sacrificed▶ Helps us view the true cost of decision making▶ Implies valuing different choices

Cost-Benefit Analysis▶ Cost – What you give up to achieve something▶ Benefit – Something you desire

▶ In decision making, it is good to weigh the Costs and Benefits of a choice

▶ E.g. Missing curfew to hang out with Friends

Analyzing

Suppose you live in a small town where all goods are bought and soldby private owners. One day, Wal-mart comes to your city’s chamberOf commerce and asks to break ground on a new building outside oftown

Costs Benefits

Wal-Mart

Local Stores Only

Positive and Normative Economics▶ Health care can be improved with

more tax funding▶ Pollution control is effective

through a system of fines▶ Society ought to provide homes

for all▶ Any strategy aimed at reducing

factory closures in deprived areas would be helpful

▶ Positive Statements: ▶ Capable of being verified or

refuted by resorting to fact or further investigation

▶ Normative Statements:▶ Contains a value judgement

which cannot be verified by resort to investigation or research