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![Page 1: Introduction to Economics. What Is It? Economics – the study of how people try to satisfy what appear to be unlimited and competing wants through the.](https://reader036.fdocuments.us/reader036/viewer/2022062517/56649e8a5503460f94b8f61a/html5/thumbnails/1.jpg)
Introduction to Economics
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What Is It?Economics – the study of how people try to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources
Scarcity – the condition that results from society not having enough resources to produce all the things people would like to have
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Three Basic Questions
What to Produce – guns or butter?
How to Produce – should we have slavery? Environmental laws and regulations? Child labor? Balance between expenses and benefits.
For Whom to Produce – how do we allocate the products of the economy, and what principles do we use? Should moral or practical considerations take precedence?
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Factors of ProductionResources required to produce the stuff we would like to have
Four Sources:
Land – includes any natural resources
Capital – includes:1. Financial capital – money used
to buy tools, equipment, etc.2. Capital goods – tools,
equipment, machinery, factories, etc.
Labor – inclusive of all workers, with the exception of…
Entrepreneurs – risk-taker in search of profits who does something new with existing resources
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ProductionThe process of creating goods and services
Can only take place after you have land, capital, labor, and entrepreneurs
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The Scope of EconomicsFour key elements:
Description – how things are. Most important measure is Gross Domestic Product (GDP): dollar value of all final goods, services, and structures produced within a nation’s borders within a year
Analysis – attempt to answer the question of “why”
Explanation – communication of analysis to others in the hope of being able to address future problems
Prediction – we want to see what is coming down the road and adjust accordingly
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The Vocabulary of Economics
Economic products – goods and services that are useful, relatively scarce, and transferable to others
Goods – an item that is economically useful or satisfies an economic want• Consumer good – intended for
final use by individuals• Capital good – a good used to
produced other goods (think factory machinery)
service – work that is performed for someone
consumer – a person who uses goods and services to satisfy wants and needs
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The Vocabulary of Economics
value – a worth that can be expressed in dollars and cents
Paradox of value – situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value
utility – the capacity to be useful and provide satisfaction
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The Vocabulary of Economics
Generally, value is determined by utility and scarcity (we do not yet have to employ practically enslaved 10 year-olds to mine water)
wealth – the accumulation of those products that are tangible, scarce, useful, and transferable from one person to another.
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The Circular Flow of Economic Activity
Market – location or other mechanism that allows buyers and sellers to exchange economic products
Factor markets – markets where productive resources are bought and sold (remember our four factors?)
Product markets – markets where producers sell their goods and services to consumers
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Productivity and Economic Growth
Economic growth – occurs when a nation’s total output of goods and services increases over time. Productivity is the most important factor in increasing growth.
productivity – measure of the amount of output produced by a given amount of inputs in a specific period of time
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Division of Labor and Specialization
Division of labor – when work is arranged so that individual workers do fewer tasks than before
Specialization – factors of production perform tasks that they can do relatively more efficiently than others
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Human Capital and Interdependence
Human capital – the sum of the skills, abilities, health, and motivation of people
Government – can provide education and healthcare
Business – can invest in training and other programs that improve the skill and motivation of its workers
Individuals – can invest in their own education by completing high school, going to technical school, or going to college
Economic interdependence – we rely on others, and others rely on us, to provide the goods and services that we consume
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Economic Choices and Decision-Making
Trade-offs – alternative choices; doing one thing necessarily means you cannot spend that time doing something else
Opportunity cost – cost of the next best alternative use of money, time, or resources when one choice is made
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Production Possibilities
Production possibilities frontier – diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed
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Thinking Like an Economist
Building Models – a model is a simplified theory or a simplified picture of what something is like or how something works.
Models are based on assumptions, things we take for granted as true.
Quality of the model depends on the quality of the assumptions
What is a rational choice?