Chapter 1, Section 1

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Chapter 1, Section 1

• The Basic Problem in Economics

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The basic problem in Economics

• Microeconomics- individuals and firms
• Macroeconomics- The economy as a whole. Larger
  firms and governments.
• Societies choose how to utilize resources.
• Those choices are the focus of economics.

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Introduction

• Economics- The study of how individuals and
  nations make choices about how to use scarce
  resources to fulfill their wants.
• Everything that exists is limited.
• Scarcity- People do not and cannot have enough
  income, time, or other resources to satisfy their
  every desire.
• People and businesses face choices everyday on
  how to use resources.

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Wants versus Needs

• I need new shoes, is this a valid statement?
• Needs are generally basics to survive such as
  food, clothing, and shelter. Education and
  health care could fall under this category.
• Wants- everything else.

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Types of Resources

• 1. Land- all natural resources.
• 2. Labor- The work people do.
• 3. Capital- The property people use to make
  other goods and services. Capital increases
  Productivity.
• 4. Entrepreneurship- People using their own
  money to start businesses or new technology.
• 5. Technology- The use of science to develop new
  products and new methods for producing and
  distributing goods and services.

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Resources continued

• Factors of production are a combination of the
  four resources.
• Goods are the items that people buy.
• Services are the activities done for others for a
  fee.
• Effect on Income and Wealth
• More factors equal more wealth.

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Section 2Trade offs

• Scarcity forces people to make decisions about
  their resources.
• Trade off- Exchanging one thing for the use of
  another.
• Opportunity cost- The value of the next best
  alternative that had to be given up for the
  alternative that was chosen.
• What do you lose when you make a choice?

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Opportunity costs

• What is the opportunity costs for the War in
  Afghanistan?
• Production possibilities- All the combinations of
  goods and services that can be produced from a
  fixed amount of resources in a given period.
• Guns versus butter, war and peace as the classic
  example.
• After the Cold War many defense contractors
  started making civilian goods.

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Section 3What do Economists do

• Economy- All the activity in a nation that
  together affects the production, distribution,
  and use of goods and services.
• They produce Economic Models, simplified
  representations of the real world.
• Models show the way people react to changes in
  the economy.
• Explanation in words, in a graph, or with a
  mathematical equation.

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The Purpose of Models

• 1. Creating- Forming a hypothesis about the
  economy.
• 2. Testing- Collect data and analyze to your
  hypothesis. Minimum wage versus teenage
  unemployment.
• 3. Applying- Put into the real world.
• Economists can not predict all the factors that
  influence behavior.