Chapter OneChapter One

What is Economics?What is Economics?

What is economics?What is economics?

The social science The social science dealing with the dealing with the study of how people study of how people satisfy unlimited satisfy unlimited wants using scarce wants using scarce resources.resources.

Studies human Studies human behavior.behavior.

Fundamental Economic Fundamental Economic ProblemProblem

Scarcity Scarcity Human wants are Human wants are

greater than the greater than the capacity of available capacity of available resources to provide resources to provide for those wants.for those wants.

Needs vs. WantsNeeds vs. Wants

NeedsNeeds are are requirements for requirements for survival.survival.

WantsWants exceed needs exceed needs or are ways of or are ways of satisfying needs.satisfying needs.

TINSTAAFLTINSTAAFL

THERE IS NO SUCH THERE IS NO SUCH THING AS A FREE THING AS A FREE LUNCH LUNCH (TINSTAAFL)(TINSTAAFL)

There is always a There is always a cost for every cost for every decision (not always decision (not always $$$)$$$)

Three Basic Economic Three Basic Economic QuestionsQuestions

WHAT must we produce? (based on WHAT must we produce? (based on need)need)

HOW should we produce it? (based on HOW should we produce it? (based on resources)resources)

FOR WHOM should we produce? (based FOR WHOM should we produce? (based on population and other markets)on population and other markets)

The Four Factors of The Four Factors of ProductionProduction

LandLand LaborLabor CapitalCapital EntrepreneurshipEntrepreneurship

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

LABOR – workers; all human LABOR – workers; all human effort, mental and physicaleffort, mental and physical

CAPITAL – manmade tools CAPITAL – manmade tools that aid in productionthat aid in production

ENTREPRENEURSHIPENTREPRENEURSHIP

Risk-takersRisk-takers Combine three Combine three

factors of production.factors of production. Make production Make production

more efficient.more efficient. Develop new Develop new

products and better products and better ways of doing things.ways of doing things.

Scope of EconomicsScope of Economics

DESCRIPTIONDESCRIPTION What does the world around us look like?What does the world around us look like?

Gross Domestic ProductGross Domestic Product UnemploymentUnemployment Tax ratesTax rates Etc.Etc.

Scope, cont.Scope, cont.

ANALYSISANALYSIS How things workHow things work Why things happenWhy things happen Helps us deal with problems that we want to Helps us deal with problems that we want to

solve.solve.

Scope, cont.Scope, cont.

EXPLANATIONEXPLANATION Knowledge can be used to solve economic Knowledge can be used to solve economic

problems.problems. Share what we learn.Share what we learn.

PREDICTIONPREDICTION Advise on future economic activitiesAdvise on future economic activities Make better decisionsMake better decisions

Basic Economic ConceptsBasic Economic ConceptsESSENTIAL VOCABESSENTIAL VOCAB

GoodsGoods Useful items; tangibleUseful items; tangible

ServicesServices Work performed for someone Work performed for someone

elseelse

ConsumersConsumers Users of goods and servicesUsers of goods and services

Types of GoodsTypes of Goods

Consumer – for Consumer – for personal usepersonal use Example – happy Example – happy

mealmeal

Capital - used for Capital - used for productionproduction Example – Example –

hammer, tractorhammer, tractor

Durable – lasts 3+ Durable – lasts 3+ years.years. Ex: appliances, carsEx: appliances, cars

Nondurable – Nondurable – immediately used upimmediately used up

Ex: – food,paperEx: – food,paper

Value, Utility and Value, Utility and WealthWealth

ValueValue

WorthWorth of a good or of a good or service as service as determined by the determined by the marketmarket

Expressed in Expressed in dollars dollars and centsand cents

Must be Must be scarcescarceand and usefuluseful

The Paradox of ValueThe Paradox of Value

What is a paradox?What is a paradox? The The paradox of value paradox of value is the contradiction that is the contradiction that

occurs when essential items have a low occurs when essential items have a low economic value, and nonessentials have a economic value, and nonessentials have a high economic value.high economic value.

AKA the AKA the diamond/water paradoxdiamond/water paradox

UtilityUtility

Capacity to be usefulCapacity to be useful Ability to provide satisfactionAbility to provide satisfaction Usually depends on person.Usually depends on person.

WealthWealth

Having goods with Having goods with value and utility.value and utility.

DOES NOT DOES NOT INCLUDE INCLUDE SERVICESSERVICES

The Circular Flow of The Circular Flow of Economic ActivityEconomic Activity

Markets – where buyers and sellers tradeMarkets – where buyers and sellers trade Factor Market – where people Factor Market – where people earnearn their their

incomesincomes Product Market – where people Product Market – where people spendspend their their

incomeincome

The Circular Flow ModelThe Circular Flow Model

Circular flow reviewCircular flow review

The whole groups should complete the The whole groups should complete the review the first time.review the first time.

Allow each group member to complete Allow each group member to complete the review individually.the review individually.

Productivity and Productivity and Economic GrowthEconomic Growth

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

Specialization/division of labor - improves Specialization/division of labor - improves productivityproductivity

Human capital – better skills, abilities, Human capital – better skills, abilities, health and motivation improves health and motivation improves productivityproductivity

Economic GrowthEconomic Growth

High High productivityproductivity Can be affected by Can be affected by

interdependenceinterdependence

Make a decisionMake a decision

You win a $1000 door prize at the senior You win a $1000 door prize at the senior meeting. You narrow down your choices of meeting. You narrow down your choices of what to do with the money to three :what to do with the money to three :

* spend it all right now in a shopping * spend it all right now in a shopping frenzyfrenzy

* save it for college* save it for college* get ahead on all of your bills* get ahead on all of your bills

Highlight your first choice now. Label the other Highlight your first choice now. Label the other choices #2 and #3.choices #2 and #3.

Economic Choices and Economic Choices and Decision MakingDecision Making

Trade-offsTrade-offs – choices faced when making – choices faced when making an decisionan decision Spend, save, pay billsSpend, save, pay bills

Opportunity CostOpportunity Cost – value of what you – value of what you give up when you make a choicegive up when you make a choice If you spend you give up the savings, maybe If you spend you give up the savings, maybe

collegecollege If you save you give up the funIf you save you give up the fun

Production Possibilities Production Possibilities FrontierFrontier

Model that shows Model that shows concept of concept of opportunity costopportunity cost

Possible Possible combinations of combinations of output if all resources output if all resources are being usedare being used

Classic exampleClassic example – – consumer vs. military consumer vs. military goods (goods (guns v. guns v. butter).butter). Butter

Guns

Inefficient

Unattainable

Full employment of resources

PPF and Economic PPF and Economic GrowthGrowth

Curve shifts outward Curve shifts outward when there is growthwhen there is growth

More products being More products being produced than beforeproduced than before

More resources, More resources, larger labor force, larger labor force, increased increased productivityproductivity

Why Study Economics?Why Study Economics?

Makes you better decision-makers.Makes you better decision-makers. Helps you understand the world around you.Helps you understand the world around you.