What is Economics?Chapter 1

Section 1Scarcity and the Science of

Economics

Basic EconomicsEconomics is very important to your

understanding of society and how our economy effects you

Economics 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 (study of needs vs. wants)

Scarcity People want what they don’t have? Most

people are not satisfied with what they haveScarcity – The condition that results from

society not having enough resources to produce all the things people would like to have.

Want vs. Need People confuse Wants and Needs all the time Needs- A basic requirement for survival

(food, Clothing, Water, Shelter)

Wants- A way of expressing a need. Not necessarily what we always need but what we desire.

“There is no such thing as a free lunch” (TINSTAAFL)

3 Basic Questions of ScarcityWhat to Produce?

How to Produce?

For Whom to Produce?

ProductionWith every item we produce we must figure

in the factors of production.Land- “gifts of nature” or natural resourcesCapital (capital goods)- the tools,

equipment, machinery, and factories used in the production of goods

Labor- people and all of their efforts, abilities, and skills

Entrepreneurs- risk takers in society who do new things with existing items in our economy.

ProductionProduction takes place when all factors of

production are present

Scope of EconomicsIn society we must be able to control our

behaviors and carefully utilize the scarce resources we have.

There are 4 key elements we must utilize in order to do this

Description – (GDP) Gross Domestic Product- the $ value of all final goods and services (this is the most comprehensive measure of a country’s total output and is key in the overall economic health of a nation

Analysis- Allows us to understand the who, what, why, and when of production

Explanation- Where economists explain why things happened the way they did.

Prediction- After looking at all other factors this allows us to see the good and bad decisions we made and how they effected production.

Section 2 Basic Economic Concepts

Goods, Services, and ConsumersGoods

A good is an item that is economically useful or satisfies an economic want (book, car, computer, etc.)Consumer Goods- Intended for final use by

individualsCapital Goods- When manufactured goods are

used to produce other goods and services.Durable Goods- Any good that lasts more than 3

years.

Goods, Services, and ConsumersServices

Services are basically a work that someone performs for someone.

A service is similar to a good but the main difference is that it is intangible meaning it cannot be touched

Goods, Services, and ConsumersConsumers

Consumers are basically the people who buy and/or use the goods

Value, Utility, and WealthValue = Worth in dollars and centsUtility- capacity to be useful and provide

satisfactionFor something to have value it must be scarce

and have utility.When you talk about value you have to see

what makes items have value. Scarcity-how rare is it? Utility- how useful is it?

Value, Utility, and WealthWealth – The accumulation of products that

are tangible, scarce, useful, and transferrable from one person to another

Adam Smith authored the book “The Wealth of Nations” in 1776He believe by getting a nation’s people to

specialize in skills it would increase productivity and therefore make a nation more wealthy.

Circular Flow Market

Circular Flow Market Factor Markets are where productive

resources are bought and soldProduct Market are where producers sell

their goods and services.Markets serve as the main link between the

individuals and businesses

Productivity and Economic GrowthWhen a country is healthy it contains

economic growth or basically an increase of total output of goods and services.

If you have and increase in productivity it benefits both the consumer and the producer

SpecializationAccording to Adam Smith Specialization is

the key to a productive society.When you have specialization of labor

workers do fewer jobs and instead specialize in certain jobs in order to get better at those jobs

This can include labor and capital

Invisible handThe invisible hand is described by Adam

SmithAdam Smith says that a true free market

economy is run by an invisible hand or where the government does not interfere but only assists the people as needed.

Chapter 1 Section 3

Economic Choices and Decision Making

Economic FactorsWhat types of events can lead to changes in

the economy?War is one because it reduces the amount of

people available for labor.Inflation – prices rise while wages remain

constant or dropNatural Disasters- Weather etc.

Trade Offs and Opportunity CostIn our society people are given many choices

this is known in economics as Trade-offsWith choices come options and this is what

leads to economic success or failure in many different factors including standard of living or (quality of life)

This is where opportunity cost comes into play.

Opportunity cost is the cost of the next best alternative use of money, time, or resources.Example / paying $500 for 2 television you

think it is the same but which one is the most valuable

Production PossibilitiesYou have to look at the production frontier

possibilities diagram to gain the concept of opportunity cost

In this diagram economists look at the following factors:Possible alternativesFully employed resourcesOpportunity costThe cost of idle resourcesEconomic Growth

Thinking like an EconomistIn order to be successful economically you

must condition yourself to think like an economist

In order to do this you must look at the following items when making economic decisions:Build simple modelsEmploy a cost-benefit analysis of itemsTake, small, incremental steps

Financial Capital or (money) is a generally a result of this type of thinking

Economics in the WorldWhen events happen in 1 part of the world

effect other parts of the world it is known as Economic Interdependence.

One form of capital utilized world wide is known as human capital

Human capital provides the following effects in an economy:Allows businesses to invest in people Allows businesses to invest in healthcare for

employeesAllows businesses to invest in specific job

training for employees