Transcript What is Economics?

What is Economics?
Chapter 1
Section 1
Scarcity and the Science of
Economics
Did You Know
 We witness scarcity with each year’s “hot” new toy.
Inspired by hunter President Teddy Roosevelt,
Americans coveted the teddy bear in 1906.
Cabbage Patch dolls were big during the 1980s, as
were Tickle Me Elmo’s in 1996. By 1999 Game
Boy’s Pokémon was the rage with a 10-cent
trading card. The most-prized first-edition pocket
monsters were in such short supply that they
commanded from $8 to $182.
Key Terms
 Scarcity – the condition where unlimited human wants
face limited resources
 Economics – the study of how people try to satisfy
wants through the use of limited resources
 Need – is a basic requirement for survival and includes
food, clothing and shelter
 Want – is way of expressing a need
 Factors of Production – are resources necessary to
produce what people want or need
 Land – refers to the “gifts of nature” or natural
resources not created by humans
Key Terms
 Capital – the tools, equipment, machinery, and
factories used in the production of goods and services
 Financial Capital – the money used to buy the tools
and equipment used in production
 Labor – People with all their efforts, abilities, and skills
 Entrepreneur – a risk taker in search of profits who
does something new with existing resources
 Production – or the process of creating goods and
services
 Gross Domestic Product (GDP) – the dollar value of
all final goods and services, and structures produced
within a country’s border In a 12 month period
The Fundamental Economic Problem
 Scarcity is the fundamental problem facing all societies

Scarcity is the condition where unlimited human wants face
limited resources
 Economics is the study of how people satisfy wants with scarce
resources
 Needs are required for survival; wants are desired for satisfaction.

A Need is a basic requirement for survival and includes food,
clothing and shelter
 Because Resources are limited everything has a cost even when it
seems like we are getting something for free
 Someone has to pay for production costs, so “There Is No Such
Thing As A Free Lunch” (TINSTAAFL).
 Three Basic Questions
 1. What must we produce?
Society must choose based
on its need
 2. How should we produce
it? Society must choose
based on its resources
Three Basic
Questions
 Mass production or that
require a lot of equipment or
an operation that only takes
a few workers
 3. For whom should we
produce? Society must
choose based on its
population and other
available markets.
The Factors of Production
 Factors of production are resources necessary to produce
what people want or need.
 Factors of Production – Land, Labor, Capital, and Entrepreneurs
Figure 1.2
The Factors of Production
 Land is the society’s limited natural resources—
landforms, minerals, vegetation, animal life, and climate
 Capital is the means by which something is produced
such as money, tools, equipment, machinery, and
factories
 Capital goods are the tools, money, equipment, machinery, and
factories and Financial capital is the money needed to produce
the capital goods
 Labor is the workers who apply their efforts, abilities, and
skills to production
 Entrepreneurs are risk-takers who combine the land,
labor, and capital into new products
 Production is creating goods and services—the result of
land, capital, labor, and entrepreneurs
 This occurs when all factors are present
The Scope of Economics
 Economics is considered what's called a Social Science
because it deals with the behavior of people as they deal with
this basic issue of unlimited wants competing with limited
resources
 The four key elements of economics are: description, analysis,
explanation, and prediction
 Economics deals with the description of economic activity—
Gross Domestic Product, unemployment rate, government
spending, tax rates, etc.; description is important because we
need to know what the world around us looks like
 GDP is a key measure of the nation’s economic health
 Analysis looks at the “why” and “how” of economic activity—
why prices go up and down, for example, or how taxes affect
savings.
The Scope of Economics
 Explanation refers to how economists communicate
knowledge of the economy and its activities to the society’s
population.
 Prediction refers to how yesterday’s and today’s economic
activities advise us of potential future activity
Section Assessment
 Synthesizing Information Give an example of a
supposedly “free” item that you see every day.
Explain why the item is not really free by stating
who or what actually pays for it
Section 2
Basic Economic Concepts
Did You Know?
 The 20 percent of the world’s people who live in
the wealthiest nations consume 86 percent of the
world’s goods and services. The 20 percent who
live in the poorest nations consume just 1.3
percent
Key Terms
 Economic Product – goods and services that are useful,
relatively scarce, and transferable to others
 Good – An item that is economically useful or satisfies an
economic want
 Consumer Good – An item intended for final use by
individuals
 Capital Goods – A manufactured item used to produce other
goods and services
 Service – Work that is performed for someone
 Value – A worth that can be expressed in dollars and cents
 Paradox of Value – The situation in which some nonnecessities have a much higher value than some necessities
 Utility - The capacity to be useful and provide satisfaction
Key Terms
 Wealth – The accumulation of those economic products
that are tangible, scarce, useful, and transferable from
one person to another
 Market – A location or other mechanism that allows
buyers and sellers to exchange a certain economic
product
 Factor Markets – A market where productive resources
are bought and sold
 Product Markets – A market where producers sell their
goods and services to consumers
 Economic Growth – The increase in a nation’s total
output of goods and services over time
Key Terms
 Productivity – A measure of the amount of output
produced by a given amount of inputs in a specific
period of time
 Division of Labor – Work arranged so that individual
workers do fewer tasks than before
 Specialization - Situation in which a factor of
production performs tasks that it can do relatively more
efficiently than others
 Human Capital – The sum of the skills, abilities, health,
and motivation of people
 Economic Interdependence – Reliance on one
another to provide the goods and services that people
consume
Profiles in Economics
 Adam Smith
1723–1790
 Pg.18
Goods, Services, and Consumers
 Goods are items that are economically useful or satisfy an economic want.
They are tangible and can be classified as consumer/capital and durable/
nondurable
 Consumer good are intended for final use by individuals
 Capital goods are goods used to produce other goods
 A durable good is a good that lasts three years or more when used on a
regular basis and include both capital and consumer goods
 Robot welders and automobiles
 A nondurable good doesn’t last for three years when used on a regular
basis
 Food, writing paper, and most clothing items
 Services are work performed for someone and are intangible
 Haircuts, home repairs, and forms of entertainment etc.
 A Consumer is a person
 Consumers use goods and services to satisfy wants and needs
Value, Utility, and Wealth
 Value is worth expressed in dollars and cents. Scarcity by itself is not
enough to create value. For something to have value, it must also have
utility
 Paradox of Value at first puzzled economists (necessities and values) it
occurs when some necessities have little monetary value whereas some
non-necessities have a large monetary value
 Water and Diamonds
 Utility is a good’s or service’s capacity to provide satisfaction, which
varies with the needs and wants of each person
 Diamonds and Water
 Wealth is the accumulation of goods that are tangible, scarce, useful,
and transferable to another person. Wealth does not include services,
only goods
 A nations wealth is not limited to items that are expressed in dollars
and cents
 In Adam Smith’s Wealth of a Nation he was referring specifically to
the ability and skills of a nations people as the source of its wealth
The Circular Flow of Economic
Activity
 A Key feature of the circular flow is the market
 Markets are locations/mechanisms for buyers and sellers to
trade. They are classified as local, regional, national, global,
and cyberspace
 A factor market is where people earn their incomes. Factor
markets center on the four factors of production: land,
capital, labor, and entrepreneurs
 A product market is where people use their income to buy
from producers. Product markets center on goods and
services
The Circular Flow of Economic
Activity
Productivity and Economic Growth
 Economic Growth occurs when a nation’s total output of
goods and services increases over time
 A number of factors are responsible for economic growth, but
productivity is the most important
 Productivity is a measure of the amount of output produced
by the amount of inputs within a certain time. Productivity
increases with efficient use of scarce resources
 Specialization and division of labor may improve productivity
because they lead to more proficiency (and greater economic
interdependence)
 Ex of division of labor would be an assembly line
Productivity and Economic Growth
 Investing in human capital improves productivity because
when people’s skills, abilities, health, and motivation
advance, productivity increases
 Economic growth depends on high productivity. Yet, an
economy’s productivity may be affected by its
interdependence—reliance on others and their reliance on us
to provide goods and services
 Example of economic interdependence: A country that produces
sugar cane goes through bad weather resulting in a low yield
causing prices to go up
 Economic interdependence does not limit a nation’s growth and
usually reduces the efficiency of production
Section 3
Economic Choices and Decision
Making
Did You Know?
 Economists reward their greatest for breakthrough
discoveries. The 1999 Nobel Prize for Economics went to
Robert A. Mundell, a Canadian economist at New York’s
Columbia University, for his career-long work in international
currency exchange rates, vital in today’s global marketplace.
The prize is worth a million dollars in U.S. currency.
Key Terms
 trade-offs - Alternative choices
 opportunity cost - The cost of the next best alternative use of
money, time, or resources when one choice is made rather than
another
 production possibilities frontier - A diagram representing
various combinations of goods and/or services an economy can
produce when all productive resources are fully employed
 cost-benefit analysis - A way of thinking about a problem that
compares the costs of an action to the benefits received
 free enterprise economy System in which consumers and
privately owned businesses, rather than the government, make
the majority of the WHAT, HOW, and FOR WHOM decisions
 standard of living - The quality of life based on possessions
that make life easier
Trade-Offs and Opportunity Cost
 Trade-offs are the alternative choices people face in making
an economic decision. A decision-making grid lists the
advantages and disadvantages of each choice.
 Opportunity cost is the cost of the next best alternative
among a person’s choices. The opportunity cost is the
money, time, or resources a person gives up, or sacrifices, to
make his final choice
Opportunity Cost
 Doing Nothing Has Its Own Opportunity Costs
 Not Investing as a young adult has its problems!!!!!
 John is 18 years old. He gets an after school job and opens a Roth IRA. He saves
$5,000 per year in it and continues doing this until he turns 70 years old. He is perfectly
average, invests in low-cost index funds, dollar cost averages, reinvests his dividends,
and earns the same return the market has for the past century or two - roughly 10% pretax and inflation. As a result, he ends up with a little more than $7,000,000 in wealth.
 Adam is also 18 years old. He gets an after school job but doesn't save anything. He
waits until he is 30 years old, at which point, he opens a series of retirement accounts
and saves $5,000 per year. He's only $60,000 in total contributions behind John, and still
has 40 years to go before he turns 70, so he figures it isn't too bad. When he reaches
retirement, though, he has only $2,200,000. That $60,000 shortfall turned into a
$4,800,000 canyon.
 In fact, by starting at 30, Adam would have to save a whopping $16,000 per year as John
continued to save just $5,000 per year simply to break even with John. The opportunity
cost of blowing his income as a young adult had enormous consequences later in life.
That is okay, if Adam thought through those choices and decided that is what he wanted.
Most people don't. That is the problem.
Opportunity Costs
 What are some opportunity costs that you may have?
Trade Offs and Opportunity Cost
Production Possibilities
Production Possibilities
 The production possibilities frontier diagram illustrates the
concept of opportunity cost. It shows the combinations of
goods and/or services that can be produced when all
productive resources are used. The line on the graph
represents the full potential—the frontier—when the economy
employs all of these productive resources
 Identifying possible alternatives allows an economy to
examine how it can best put its limited resources into
production
Production Possibilities
Production Possibilities
 Considering different ways to fully employ its resources
allows an economy to analyze the combination of goods and
services that leads to maximum output
 An economy pays a high cost if any of it resources are idle.
It cannot produce on its frontier and it will fail to reach its full
production potential
 Economic growth made possible by more resources, a larger
labor force, or increased productivity causes a new frontier
for the economy
Production Possibilities
Production Possibilities
Thinking Like an Economist
 Building simple models helps economists analyze or
describe actual economic situations
 A model is a simplified theory or a simplified picture of
what something is like or how something works
 Circular Flow Diagram or Production Possibilities Frontier
Model
 Cost-benefit analysis helps economists evaluate alternatives
by looking at each choice’s cost and benefit
 Taking small, incremental steps in implementing an economic
decision helps economists test whether the estimated cost of
the decision was correct
 Test Coffee first!!
The Road Ahead
 Studying economics will help us know how the economy works
on a daily basis
 It helps us understand a free enterprise economy, where people
and privately owned businesses, rather than the government,
make the majority of the economic decisions
 The study of economics will provide a working knowledge of
property rights, competition, supply and demand, the price
system, and the economic incentives that make the American
economy function
 All of which has a bearing on our standard of living
 The study of economics helps us to become better decision
makers
 Most of today’s political problems have economic impacts: How
important is it that we balance the federal budget? How can we keep
inflation in check? What methods can we use to strengthen our
economy?
 The world of economics is complex and dynamic, as is our
society