Chapter 1: What is Economics?
What is Economics?Chapter 1Section 1-1: The Basic Problem in
EconomicsWhat is economics?The study of how people satisfy their
unlimited wants and needs with limited resources (people have to
make choices)Wants vs. Needs:Wants are anything other than what is
needed for basic survivalNew car, video games, or a stereo
systemNeeds are things required for basic survivalFood, clothing,
and shelter
Economic ChoicesChoices are a result of unlimited wants in a
world of limited resources (scarcity exists)Spending and production
decisions involve choicesChoices compete with each othergoing to
dinner vs. going to the movies choices: 1. Eat steak and no movie,
2. Eat a burger and go to a budget movie, 3. Eat at home and see a
new releaseSocieties and businesses face choices about how to
utilize their resources in the production of goods and
services.
ScarcityAll resources are limited.Income, time, natural
resourcesPeople compete for limited resourcesScarcity- not being
able to have all of the goods and services one wants- an item is
scarce even if the store shelves are full-that is why we pay for
things (different from shortages)
cont.
Scarcity always exists because of competing alternative uses for
resources. (Why cant everyone have a big house?)Factors of
Production (p.6 figure 1.3)Resources used to produce goods and
services- land, labor, capital, and entrepreneurshipLand: natural
resources and surface land and waterLand, water, fish, animals,
forests, mineral deposits
cont.Labor: the work people do-human effort both physical and
mentalresults in economic goods and servicesGoods are tangible
objects that satisfy peoples wants or needsEx. Clothes, food, cars,
etc.Services are actions that can satisfy peoples wants or needsEx.
Seeing a doctor, watching a baseball game, getting my oil
changedcont.
Capital: manufactured goods used to make other goods and
services Ex. Machines, buildings, and tools used to assemble
automobilesCapital increases productivity- the amount of output
that results from a given level of inputsEntrepreneurship: the
ability to start a new business or create new productsAbout 30% of
new business enterprises failOf the 70% that survive, only a few
become successfulcont.Technology: (sometimes considered the 5th
F.O.P) the use of science to develop new products and production
needs
Trade-OffsTrade offs: sacrificing one good or service to
purchase or produce anotherTrade-offs involve opportunity
costsOpportunity costs are the value of the next best alternative
given up for the alternative that was chosenThere is no free lunch-
everything has a cost because you could be doing something else
with your time ex. Working, studying, sleeping, watching TV (all
have value)
Production Possibilities CurveThe production possibilities curve
shows the maximum combination of goods and services that can be
produced from a given amount of resources.Ex. Military spending vs.
domestic programs (trade off because of opportunity cost- we cant
have all of both-resources are scarce) (p. 16)Using a production
possibilities curve, a producer can decide how to use
resources.
What do Economists Do?Two parts of economicsMicroeconomics: the
branch of economic theory that deals with behavior and decision
making by small units-individuals and firmsMacroeconomics: the
branch of economic theory that deals with the economy as a whole
and decision making by large units (ex. Governments)Economy:
activity that affects the production and distribution of goods and
services in a society
Economic ModelsEconomic models are used to predict behavior in
the real worldModels:some factors remain constantshows basic
factors, not every detailModels may not always be accurate due to
the inability to predict human behavior.
Schools of Economic ThoughtEconomists are influenced by personal
opinions, beliefs, and the government under which they liveThis
leads to different economic theoriesDifferent schools of thought
can have an impact on laws and government policies.Judgements about
economic policies depend on a persons valuesValues are beliefs or
characteristics that a person or group considers
importantEconomists inform us to the possible short and long term
outcomes of policies.
