“What is Economics?”

What is Economics?The study of economics begins with the idea that people cannot have everything that they need or want.The study of how people make choices – utilizing limited resources – to satisfy their __NEEDS____ and __WANTS__Why must people make such choices?The reason is _SCARCITY-LIMITED RESOURCES.

Economic Choices:People always have to make choices about how to meet their needs and wants.A _NEED_ is something we must have in order to survive – food and water, clothing, and shelter.A _WANT___ is something we would __LIKE TO HAVE__ but that isn’t necessary for our survival – things like a car, that new CD, or a cell phone.Obviously, our needs and wants are _UNLIMITED. However, the resources at our disposal to meet our needs and wants are _LIMITED_.This combination of limited resources but unlimited needs and wants is THE BASIC PROBLEM OF ECONOMICS.

The Three Basic Questions are:

What to produce? How to produce?

And For whom to produce?

GOAL OF ECONOMICS: solving the problem of SCARCITY!!!!!

What is the Goal of Economics??Need: something people need that is necessary for survival (ex: air, food, shelter)  Want: an item we desire but that is not essential to survival  Economics: the study of how people seek to satisfy their needs and wants by making choices Why do we have to make these choices???? SCARCITY!!!! Goods: physical objects such as shoes and shirts Services: actions or activities that one person performs for another (ex: haircuts, tutoring, dental checkups, etc) Scarcity: limited resources to meet unlimited wants ** All goods and services we produce are scarce!!!!!! Shortage: NOT the same as scarcity. A shortage occurs when producers will not or cannot offer goods or services at the current prices….can be temporary or long term. (wars and droughts can create shortages)  

** scarcity always exists because our needs and wants are always greater than our resource supply. Goods and services are scarce because they are all made from resources that are scarce.

Factors of Production Remember…….Goods: tangible productsServices: work that is performed for someone else Factors of Production Resources necessary to produce goods and services- natural resources, labor, capital, and entrepreneurs LandAll natural resources use to produce goods and servicesIncludes all material found in naturei.e. land, water, coal, forest, dirt, etc.  Laborhuman effort directed toward producing goods and servicesboth physical and mental efforts Capitalany human made resource that is used to produce other goods and servicesphysical capital: (capital good) human made objects that create other goods and services…..machinery, buildings, tools, etc. - save people time and money- Benefits of physical capital: extra time, more knowledge,more productivity- human capital: the knowledge and skills a worker gains through education and experience Entrepreneurs- ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and servicesindividuals who start new businesses, introduce new products, and improve management techniquesuse factors of production to produce new products 

Costs of Production Remember…… Scarcity forces people to make decisions about how they will use their resources!!! **Economic decision making requires people to consider all the costs and benefits of a decision What are trade-offs??? What is an opportunity cost??? Fixed Costs- Costs or expenses that are the same no matter how many units of are good are produced Ex: mortgage payments, rent Variable Costs- Costs or expenses that change with the number of products producedEx: wages, raw materials, electricity bills, water bills- These costs increase when production increases and decrease when production decreases Total Costs- Fixed Costs + Variable Costs= Total Costs Marginal Costs- The extra or additional cost of producing one additional unit of an outputEx: 30 bike helmets= $1500, 31 bike helmets= $1550 marginal cost= $50 Marginal Revenuethe extra revenue that results from selling one more unit of an output Cost-Benefit Analysis- an economic decision making technique that tells us to choose an action or make a decision when the benefits are greater than the costs Law of Diminishing Marginal Returns- a company’s goal is to make as much profit as possible- Profit: is money a company has made after costs have been deducted. - Companies can increase profit by maximizing efficiency in production. - Often, by adding more land, labor, or capital, companies can increase their profit.

-Law of Diminishing Marginal Returns: a level of production in which the marginal product of labor decreases as the number of workers increases. Other Terms to Know- Capital Goods: raw materials that are used to make goods and services- Consumer Goods: goods bought in the market. These goods are consumed and are not used to produce more goods. **As the cost of capital goods rises, the price of producing consumer goods also rises.