What is Economics?

1
Chapter 1

• What is Economics?

2
Section 1-1 The Basic Problem in Economics

• What is economics?
• The study of how people satisfy their unlimited
  wants and needs with limited resources (people
  have to make choices)
• Wants vs. Needs
• Wants are anything other than what is needed for
  basic survival
• New car, video games, or a stereo system
• Needs are things required for basic survival
• Food, clothing, and shelter

3

• Economic Choices
• Choices are a result of unlimited wants in a
  world of limited resources (scarcity exists)
• Spending and production decisions involve choices
• Choices compete with each other
• going to dinner vs. going to the movies
• choices 1. Eat steak and no movie, 2. Eat a
  burger and go to a budget movie, 3. Eat at home
  and see a new release
• Societies and businesses face choices about how
  to utilize their resources in the production of
  goods and services.

4

• Scarcity
• All resources are limited.
• Income, time, natural resources
• People compete for limited resources
• Scarcity- not being able to have all of the goods
  and services one wants- an item is scarce even if
  the store shelves are full-that is why we pay for
  things (different from shortages)
• cont.

5

• Scarcity always exists because of competing
  alternative uses for resources. (Why cant
  everyone have a big house?)

6

• Factors of Production (p.6 figure 1.3)
• Resources used to produce goods and services-
  land, labor, capital, and entrepreneurship
• Land natural resources and surface land and
  water
• Land, water, fish, animals, forests, mineral
  deposits
• cont.

7

• Labor the work people do-human effort both
  physical and mental
• results in economic goods and services
• Goods are tangible objects that satisfy peoples
  wants or needs
• Ex. Clothes, food, cars, etc.
• Services are actions that can satisfy peoples
  wants or needs
• Ex. Seeing a doctor, watching a baseball game,
  getting my oil changed
• cont.

8

• Capital manufactured goods used to make other
  goods and services
• Ex. Machines, buildings, and tools used to
  assemble automobiles
• Capital increases productivity- the amount of
  output that results from a given level of inputs
• Entrepreneurship the ability to start a new
  business or create new products
• About 30 of new business enterprises fail
• Of the 70 that survive, only a few become
  successful
• cont.

9

• Technology (sometimes considered the 5th F.O.P)
  the use of science to develop new products and
  production needs

10
Section 1-2 Trade-Offs

• Trade offs sacrificing one good or service to
  purchase or produce another
• Trade-offs involve opportunity costs
• Opportunity costs are the value of the next best
  alternative given up for the alternative that was
  chosen
• There is no free lunch- everything has a cost
  because you could be doing something else with
  your time ex. Working, studying, sleeping,
  watching TV (all have value)

11

• Production Possibilities Curve
• The production possibilities curve shows the
  maximum combination of goods and services that
  can be produced from a given amount of resources.
• Using a production possibilities curve, a
  producer can decide how to use resources.

12
Figure 3
13
Figure 4
14
Toms Trade-offs The Production Possibility
Frontier
15
Section 1-3 What do Economists Do?

• Two parts of economics
• Microeconomics the branch of economic theory
  that deals with behavior and decision making by
  small units-individuals and firms
• Macroeconomics the branch of economic theory
  that deals with the economy as a whole and
  decision making by large units (ex. Governments)
• Economy activity that affects the production and
  distribution of goods and services in a society

16

• Economic Models
• Economic models are used to predict behavior in
  the real world
• Models
• some factors remain constant
• shows basic factors, not every detail
• Models may not always be accurate due to the
  inability to predict human behavior.

17

• Schools of Economic Thought
• Economists are influenced by personal opinions,
  beliefs, and the government under which they live
• This leads to different economic theories
• Different schools of thought can have an impact
  on laws and government policies.
• Judgements about economic policies depend on a
  persons values
• Values are beliefs or characteristics that a
  person or group considers important
• Economists inform us to the possible short and
  long term outcomes of policies.