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What is Economics?
Scarcity and the Science of Economics
 It is the study of how people try to satisfy
what appears to be seemingly unlimited and
competing wants through the careful use of
relatively scarce resources.
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 The condition that results from society not having
enough resources to produce all of the things
people would like to have.
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 There Is No Such Thing As A Free Lunch
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 What to produce?
 How to produce?
 For whom to produce?
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• Land: The “gifts of nature”.
• Capital: The tools, machinery, and factories used in
the production of goods and services. (Financial
capital is the money used to buy these resources)
• Labor: People, with all of their efforts, abilities, and
skills.
• Entrepreneurs: Risk takers in search of profits who do
something new with existing resources.
• Production: The process of creating goods and
services. (Land + Capital + Labor + Entrepreneurs)
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Economics is a social science.
There are four key elements to
the study of this science:
Description
Analysis
Explanation
Prediction
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 Economics deals with the description of economic
activity. Description is important because we need
to know what the world around us looks like.
 Gross Domestic Product, or GDP, is the dollar
value of all final goods and services, and structures
produced within a country’s borders in a twelve
month period.
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 Analysis has helps us to discover why
things work and how things happen.
 Why are the prices of some things
high why some things are low?
 Why do some people earn higher
incomes than other people?
 How do taxes affect people’s desire to
work and save?
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• It’s necessary for economists to be able to explain
economic activity.
• After economists understand why and how things
work, it is useful and even necessary to
communicate this knowledge to others.
• If we all have a common understanding of the way
our economy works, some economic problems will
be much easier to address or even fix in the future.
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• Economics deals with the study of what is, or what
tends to be. Therefore, it can help predict what may
happen in the future, as well as the likely
consequences of different courses of action.
– Will my income rise or fall in the future, and
how will that affect my spending habits?
– What will the consequences be for a community
be that is trying to decide between higher taxes
on homeowners or higher taxes on businesses?
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Basic Economic Concepts
• Economic products: 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: A good that is intended for final use by
individuals.
– Capital Good: manufactured goods that are used to
produce other goods and services.
– Durable Goods: Any good that lasts for three or more
years when used on a regular basis.
– Nondurable Goods: Any good that doesn’t last for three
years when used on a regular basis.
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• Services: Work that is performed for someone.
• Consumers: A person who uses goods and services
to satisfy wants and needs. Consumers indulge in
consumption in order to satisfy their wants and
needs.
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• Value: In economics, it refers to a worth that can be
expressed in dollars and cents.
• Utility: The capacity to be useful and provide
satisfaction. It may vary from one person to the next.
• Wealth: An accumulation of those products that are
tangible, scarce, useful, and transferable from one
person to another.
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 Paradox of value: A situation that shows that scarcity by
itself is not enough to create value. Ex: Diamonds vs.
Water
vs.
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 Market: A location or other mechanism that allows
buyers and sellers to exchange a certain economic
product. They may be local, regional, national, or
global.
 Factor Markets: the markets where productive resources
are bought and sold.
 Product Markets: Markets where producers sell their
goods and services to consumers.
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• Economic Growth: This occurs when a nation’s total
output of goods and services increases over time.
• Productivity: A measure of the amount of output
produced by a given amount of inputs in a specific
amount of time.
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• Division of Labor and Specialization
– Division of labor: Takes place when work is
arranged so that workers do fewer tasks than
before.
– Specialization: Takes place when factors of
production perform tasks that they can do
relatively more efficiently than others.
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• Investing in Human Capital: Human capital is sum of
the skills, abilities, health, and motivation of people.
• Investing in the Future: When governments,
businesses, and other organizations invest in human
and physical capital, they can increase production and
promote economic growth.
• Economic Interdependence: When an entity depends,
and is depended upon by, other economies.
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Economic Choices and Decision Making
 Everyone faces trade-offs when they make a decision
 Every decision someone makes is based on their own
set of criteria
 If you are given a gift of $100, how do you decide how to
spend it?
 Clothes?
 Food?
 Concert tickets?
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 Opportunity Cost is how economists value decision
making.
 It is the cost of the next best alternative use of money,
time, or resources.
 Studying vs. Partying
 Working vs. Spare Time
 Clothes vs. Concert Tickets
 When you make this decision, you are using cost-benefit
analysis.
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• This is a diagram representing various combinations of
goods and/or services that can be produced when all
resources are utilized.
• Companies are able to make this decision on their own
because we are in what is called a free-enterprise
economy. This is when consumers and private
businesses get to decide WHAT, HOW, and FOR
WHOM they will produce things.
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