Basic Economics13th Edition

Frank V. Mastrianna

© 2003 South-Western College Publishing Company

Chapter 1

The Nature and Scope of Economics

3

Economics Defined

How people and institutions make choices

How the choices determine how resources are used

4

Economics as a Science

Organized body of knowledge

Coordinated, arranged, and systematized according to general laws and principles

Social scienceStudy of the behavior and interactions of

human beings as individuals and in groups

5

Economic Theory and Policy

Economic TheoryEconomic TheoryDevelops rules and principlesGuide for action under a given set of circumstances

Economic PolicyEconomic PolicyWhat is actually done under a given set of

circumstancesPolitical, military, and social aspects

6

Production

ProductionProductionCreation or addition of utility

UtilityUtility ability of a good or service to satisfy a want

Total ProductTotal Product sum of all goods and services produced by an economy over a given period of time

7

Distribution DistributionDistribution

Allocation of the total product among productive resources

Monetarily distribution of money incomes among the owners of the productive resources

8

Productive Resources

Inputs or resources necessary before a person or business can engage in the production of a good or serviceLaborLabor time and effort expended by human beings

involved in the production processLandLand the resources of the land, sea, and airCapitalCapital goods used to produce other goods and

servicesEnterpriseEnterprise act of organizing and assuming the

risk of a business ventureEntrepreneurEntrepreneur person who organizes and assumes risks

9

Functional Distribution of Income

RESOURCES

Labor

Land

Capital

Enterprise

TYPES OF PAYMENT

Wages

Rent

Interest

Profits

TOTAL PRODUCT

10

Positive and Normative Economics

Positive economicsPositive economicsEconomics of what isRelationships that are verifiable

Normative economicsNormative economicsEconomics of what ought to beCombines economics and politics and policy

11

Consumption

Use of a good or service

Ultimate end of economic activity

Production and distribution driven by consumption desires

12

Goods and Services

Free good Consumer goods

Capital goodsPublic good

13

Economic Good

Object or service UtilityScarceTransferable

ScarcityScarcityNot a sufficient amount available to meet everyone’s

wantsPrice has to be paid to obtain the good or serviceGreater the scarcity, the greater the value or price

14

Free Goods and Public Goods

Free GoodFree GoodGood that lacks the element of scarcity no price

Public GoodPublic GoodEconomic good to the supplierFree to the userPublic parks, libraries, and the interstate highway

system

15

Consumer and Capital Goods

Consumer GoodsConsumer GoodsGoods that are directly used by the consuming

publicBooks, paper, food, clothing

Capital goodsCapital goodsGoods used to produce other consumer or capital

goodsBuildings, machinery, equipmentDurable and non-durable

16

Wealth and Income

WealthWealthValue of things at a particular time

Human capitalHuman capitalthe stock of labor talents and skills used to increase

productivity

Total incomeTotal incomethe total value of the goods and services produced

over a period of time (usually 1 year)

17

Micro and Macroeconomics

Microeconomics: deals with the economic problems of the individual, the firm, and the industry

Macroeconomics: deals with the aggregates of economics - total production, total employment, and general price level