The Fundamental Economic Problem

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IntroducingEconomics
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What is Economics?
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Economics

• The study of how people try to satisfy their
  material needs and wants with the available
  resources.

The Primary Focus of Economics

• Our efforts and ability to provide ourselves with
  our material needs and wants
• How we use what we have to get what we want.

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Needs Necessary for Life

• Biological Needs
• Food
• Water
• Shelter
• Societal Needs
• Comfort/Luxury
• Security (safety, health, future)
• Entertainment
• Love/Acceptance

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Needs and Wants

• Needs Necessary for life.
• Wants fulfill our needs.

But, where does our stuff come from?
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ECONOMIC RESOURCES a/k/a Factors of Production
Property Resource Human Resource Property
Resource
CAPITAL GOODS Tools, Machinery, Equipment used
in the production of goods services FINANCIAL
CAPITAL Money used to run the business and
purchase capital goods
LAND Anything that would be here, even if we
werent. Natural Resources.
LABOR People carrying out the work (producing
goods or providing services
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• Entrepreneurs
• Special group
• Risk takers
• Innovators
• Driving force in the economy
• Create jobs
• Create economic growth

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The Three Basic Econ. Questions
HOW DO WE DECIDE WHAT TO PRODUCE???

• What to Produce?
• How to Produce?
• For Whom to Produce?

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Economics Survivor

• Last summer, you went on a fabulous Alaskan
  Cruise!

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There was much fun to be had
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but unfortunately, you and two of your friends
fell overboard.
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You are now stranded on a previously uncharted
and unknown island to the south of Kodiak Island
in the Gulf of Alaska.
You are here.
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No one noticed you were missing.
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You must now try to survive in the hopes that
someday someone finds you.You cannot escape the
island. Dont even try.
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There are sharks out there.
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There is a sandy and rocky beach, and very rough
cliffs. The interior of the island is
mountainous, with thick forest of Douglas fir and
Sitka spruce trees.
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• The wildlife consists of deer, rabbits, seagulls,
  eagles, fish and clams.
• It has a mild, temperate climate (lucky for you
  it is summer), but the weather is very
  changeable.
• There are frequent rain showers and fog can be
  heavy in the mornings and evenings..

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Your salvaged equipment

• You have
• 1 compass
• 2 rain ponchos
• 1 book of matches (dry)
• 2 knives
• 3 life preservers
• 2 paddles
• 1 small axe
• And the wet clothes you are wearing.

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You do not have.

• A lifeboat or raft (I have no idea why you have
  paddles!)
• A radio
• Any of the skills the Professor had on Gilligans
  Island. (Also, there are no coconuts.)

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Your Task

• Write a survival plan (1 per group). It must
  include the following
• What are your resources? List all available
  land, capital, labor and entrepreneurial
  abilities.
• How will you answer the three basic questions?
• How will you meet all of your biological and
  societal needs?
• Please be detailed. Remember, escape is not an
  option.
• Sadly, I must insist that neither murder nor
  cannibalism will
• be acceptable alternatives. Be creative.

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About your island

• It has a mild, temperate climate (lucky for you
  its summer), but the weather is very changeable.
• There are frequent rain showers and fog can be
  heavy in the mornings and evenings.
• There is a sandy and rocky beach, and very rough
  cliffs. The interior of the island is
  mountainous, with thick forest of Douglas fir and
  Sitka spruce trees.
• The wildlife consists of deer, rabbits, seagulls,
  eagles, fish and clams.

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Your salvaged equipment

• You do not have
• A lifeboat or raft (I have no idea why you
  have paddles!)
• A radio
• Any of the skills the Professor had on
  Gilligans Island. (Also, there are no coconuts.)

• You have
• 1 compass
• 2 rain ponchos
• 1 book of matches (dry)
• 2 knives
• 3 life preservers
• 2 paddles
• 1 small axe
• And the wet clothes you are wearing.

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The Fundamental Economic Problem
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Economic Terminology

• Good
• Item that is economically useful or satisfies a
  want.
• Consumer Good Intended for final use by an
  individual.
• Capital Good A manufactured items used to
  produce another good.
• Services
• Work or labor performed in the course of business
• Consumer
• Person who uses a good or service

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. . . .
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.. .
.. .
.. .
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Scarcity (concept)

• The wants and needs for material things among
  people in a society are unlimited
• The economic resources to fulfill those wants and
  needs are limited
• This limits our options and forces us to make
  choices
• UNLIMITED WANTS NEEDSLIMITED RESOURCESFORCES
  US TO MAKE CHOICES.

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Opportunity Cost

• The value of the next best alternative given up
  when a choice is made

• Everything has a cost, but not necessarily a price

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Trade-Off

• To get one thing, you must always give up
  something else
• Every choice involves both costs and benefits
  that must be evaluated
• TINSTAAFL There is no such thing as a free
  lunch

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Economics (further) Defined

• The science of economics is concerned with the
  efficient use of limited resources to achieve
  maximum satisfaction of human material wants.
• How to get the most stuff that people want at the
  least cost

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• Value Worth represented in dollars
• The Paradox of Value Contradiction between the
  value of essentials and non-essentials
• Utility measurement of satisfaction, usefulness
• Wealth Sum of tangible goods