ECONOMICS NOTESECONOMICS NOTES

• Chapter 1Chapter 1

What is the basic What is the basic economic problem?economic problem?

SCARCITYSCARCITY

ScarcityScarcity

• Scarcity exists because of unlimited Scarcity exists because of unlimited wants and needs with limited wants and needs with limited resources availableresources available

How can we deal with How can we deal with scarcity?scarcity?

LegallyLegally

1.1. RationingRationing

2.2. SubstitutionSubstitution

3.3. TradeTrade

4.4. Locate other SourcesLocate other Sources

5.5. Create AlternativesCreate Alternatives

PPV (People Powered PPV (People Powered Vehicle) from the 1970’sVehicle) from the 1970’s

IllegalIllegal

1.1. TheftTheft

2.2. BlackmarketBlackmarket

3.3. CounterfeitCounterfeit

• EconomicsEconomics – The Study of how – The Study of how goods and services are produced, goods and services are produced, distributed and consumeddistributed and consumed

• GoodGood – tangible products – tangible products

• ServiceService – intangible items of value – intangible items of value

• ex. - haircut, oil change, educationex. - haircut, oil change, education

• Production Production – creation of goods and – creation of goods and servicesservices

Basic Economic Basic Economic QuestionsQuestions::

• WhatWhat? To produce? To produce

• HowHow? To produce it? To produce it

• For WhomFor Whom? Who benefits from the ? Who benefits from the productionproduction

Factors of ProductionFactors of Production – – resources necessary for resources necessary for production to take placeproduction to take place• LandLand – natural resource – natural resource• ex. ex. Tree in the forest, coal in the groundTree in the forest, coal in the ground• LaborLabor – human resource – human resource • ex. Person cutting down the treeex. Person cutting down the tree• CapitalCapital – man made resource – man made resource • ex. The tree after it is cut downex. The tree after it is cut down• EntrepreneurshipEntrepreneurship – organizational – organizational

resource resource • ex. The person who decides what trees ex. The person who decides what trees

are cut, hires the workers, and oversees are cut, hires the workers, and oversees the production.the production.

• Financial CapitalFinancial Capital – money used to – money used to buy productsbuy products

• Capital goodsCapital goods – tools, equipment or – tools, equipment or other manufactured goods used to other manufactured goods used to produce other goods/services.produce other goods/services.

• Model Model – tool used by economists to – tool used by economists to make predictions ex charts, graphs, make predictions ex charts, graphs, diagramsdiagrams

• Data Data – factual information– factual information

• PredictionsPredictions – educated guesses – educated guesses based on data * the more data, the based on data * the more data, the more accurate the predictionsmore accurate the predictions

• Division of LaborDivision of Labor – dividing up jobs – dividing up jobs into specific tasks ex assembly Lineinto specific tasks ex assembly Line

• which leads towhich leads to• SpecializationSpecialization – becoming skilled at – becoming skilled at

a specific task ex. Teacher, a specific task ex. Teacher, electrician, auto mechanics etc.electrician, auto mechanics etc.

• Which leads to Which leads to • Specialized CapitalSpecialized Capital – tools used for – tools used for

a specific task ex. X-ray machine, a specific task ex. X-ray machine, hydraulic lifthydraulic lift

• WealthWealth – accumulation of goods – accumulation of goods and/or resourcesand/or resources

• Economic InterdependenceEconomic Interdependence – – economic activities in one part of the economic activities in one part of the country or world affects what country or world affects what happens elsewhere, work in your happens elsewhere, work in your specialty and you are dependent on specialty and you are dependent on others to provide your other needs.others to provide your other needs.

• Income Income – flow of value– flow of value• You do not have to have a high You do not have to have a high

income to become wealthy, and if income to become wealthy, and if you have a high income it does not you have a high income it does not guarantee that you will be wealthyguarantee that you will be wealthy

Trade-OffTrade-Off – giving up one – giving up one thing in exchange for thing in exchange for something elsesomething else• Opportunity CostOpportunity Cost – the value of the item – the value of the item

you give up when a choice or decision is you give up when a choice or decision is mademade

• Example – Next year you have the Example – Next year you have the choice of going to work or going to college.choice of going to work or going to college.

• If you choose to go to college, what is your If you choose to go to college, what is your opportunity cost?opportunity cost?– The money you would earn working.The money you would earn working.

• If you choose to work instead, what is your If you choose to work instead, what is your opportunity cost?opportunity cost?– The increased earnings you will have in the future.The increased earnings you will have in the future.

Rational ChoiceRational Choice – giving up – giving up something of lesser value in something of lesser value in exchange for something of exchange for something of greater valuegreater value• UtilityUtility – usefulness of an item – usefulness of an item

MarketMarket – where products and – where products and resources are bought and soldresources are bought and sold

• Factor MarketFactor Market – where the 4 factors – where the 4 factors of production are bought and soldof production are bought and sold

• Product MarketProduct Market – Market where all – Market where all final goods/services are bought and final goods/services are bought and soldsold

Circular Flow ChartCircular Flow Chart – – Diagram of the economy that Diagram of the economy that shows the flow of goods, shows the flow of goods, services, resources and valueservices, resources and value

• Product Market

Households

Factor Market

Factories orFirms

What is missing? Where What is missing? Where else would your money go?else would your money go?

Banks, government, other Banks, government, other countries in tradecountries in trade

Graphs:Graphs:

• X axis is the horizontal axisX axis is the horizontal axis

• Y axis is the vertical axisY axis is the vertical axis

• A graph is a model not reality, A graph is a model not reality, because it can not include all of the because it can not include all of the factors.factors.

• Production Possibilities Frontier Production Possibilities Frontier GraphGraph – is a graph that shows the – is a graph that shows the different combinations of 2 products different combinations of 2 products produced from the 4 factors of produced from the 4 factors of production availableproduction available

• Sample GraphSample GraphData:Data:CombinationsCombinations Radio TV Radio TV

AA 600 600 0 TV0 TV BB 400 400 50 50

CC 200 200 100 100DD 0 0 150 150

RadioRadio

• If production appears inside the production If production appears inside the production possibilities frontier (pt p) this means?possibilities frontier (pt p) this means?– the firm is not using all of it’s factors of the firm is not using all of it’s factors of

production production • OROR

– it is not using it’s resources efficientlyit is not using it’s resources efficiently

• Production represented by the curve is at Production represented by the curve is at maximum efficiencymaximum efficiency

• Production can not take place outside the Production can not take place outside the frontier at this time. In order for production frontier at this time. In order for production to take place outside the frontier in would to take place outside the frontier in would require . . . require . . .

– More resourcesMore resources• OrOr

– New technologyNew technology

Decision Making ProcessDecision Making Process::

• The 5 steps include:The 5 steps include:

• Define the problemDefine the problem• list alternatives (choices)list alternatives (choices)• List Criteria (priorities or what is important List Criteria (priorities or what is important

to you)to you)• Evaluate (+means it meets the criteria, - Evaluate (+means it meets the criteria, -

means it does not)means it does not)• Make a decisionMake a decision

Sample:Sample:

What college should I attend?What college should I attend?