CHAPTER 1 ECONOMICS Economic Notes Chap.1 What is Economics ? Section 1-1

OVERVIEW OF CHAPTER 1- SECTION 1 OVERVIEW — A definition of Economics by identifying the purpose and need of choices. A look at the basic problem of economists and the importance of the factors of production. 8BcPLY&feature=fvwrelhttp:// 8BcPLY&feature=fvwrel

I. What is Economics? A. A Social Science — studies how people meet their needs and wants thru the scarce use of a limited amount of resources. 1) Needs — things deemed necessary for survival a. Basic needs — food, shelter, clothing b. High level needs — communication, transportation, knowledge 2) Wants — Expressions of a need. Food is a need, what you want to eat is an expression of the need.

B. Economics is a series of Choices that must be made because there is a limited amount of resources. Choices made include the choice of what: 1) Goods — Physical objects (clothing, cars, computers, food) 2) Services — Actions / activities that one performs for another EACH OF THESE ARE SUBJECT TO THE INDIVIDUAL ’ S CHOICE.

GOODS AND SERVICES QUIZ. 1. Anything anyone wants or needs is marketing goods Services 2. The performance of any duties or work for another; helpful or professional activity is marketing goods Services 3. Items such as food and clothing, that satisfy human wants or needs are producer goods consumer goods capital goods 4. Items such as raw materials and tools, used to make other goods are producer goods consumer goods capital goods 5. Goods, such as machinery, used in the production of commodities or products are producer goods consumer goods capital goods

ALL OBJECTS HAVE A “VALUE” C. All goods and services have an assigned value. Value is determined by the usefulness and satisfaction a product gives a person. This usefulness and satisfaction is called Utility.

UTILITY IS SUBJECT TO CHANGE! MARGINAL UTILITY--The amount of additional usefulness and satisfaction a product gives with each additional purchase. DIMINISHING MARGINAL UTILITY-- When the usefulness and satisfaction of each additional purchase goes down.

DIMINISHING MARGINAL UTILITY--EXAMPLE A person who is very hungry buys one hamburger. This hamburger satisfies most of their appetite. The second hamburger fills the person up. It does not satisfy as big of a hunger problem as the first hamburger does, less satisfaction is felt. A third hamburger makes the person feel physically uncomfortable, thus NO satisfaction is obtained!

II. What is the Fundamental Economic Problem? A. All societies / people face the economic problem of “ Scarcity ” : 1) Scarcity — a limited quantity or resources to meet unlimited needs / wants. Scarcity is a permanent situation because wants are greater than resources. 30Mhttp:// 30M

Scarcity vs. Shortage Scarcity--a permanent situation due to lack of resources. Shortage — Temporary to long term lack of goods caused by actions of man (man made shortages) or forces of nature (Drought, hurricane, etc)

III. Deciding How to Meet Needs— Using the Factors of Production To provide for people, society must produce products. Production is based on what is needed and what resources are available. All products are made thru the combination of the Factors of Production (F.O.P.) These F.O.P. are Land, Labor, And Capital.

Factor of Production--LAND 1) Land—all natural resources used to produce goods and services. This can include fertile land for farms, natural resources, and the climate and forces of nature. This factor is the most permanent and varies the least.

Factor of Production-LABOR 2) Labor—Effort that a person devotes to producing a product. This factor tends to vary the most and is the first to be changed in changing production levels.

Factor of Production-- CAPITAL 3) Capital — Capital are those things added to resources and labor to produce a product. Capital can be divided into 3 areas: a. Physical capital(Capital goods) – all products used to make a finished product. Includes things like buildings, machinery, and tools b) Human capital — the knowledge and skill a worker gains from education and experience. c) Financial capital — money initially invested or then reinvested to purchase land labor or physical capital.

The Entrepreneur B. The Entrepreneur — People who take the risk to combine the F.O.P. to create new goods and services.

Economic Notes Chap.1 What is Economics ? Section 1-2 OVERVIEW — Examining all the alternatives given up when an economic choice is made and the very best alternative given up when a choice is made. How do individuals and business make decisions.

I. TRADEOFFS All the alternatives (MULTIPLE) given up when an economic decision is made. Tradeoffs can occur at three levels: A. Individuals-Tradeoffs involve personal choices and freedoms B. Businesses — Tradeoffs involve choices on how to efficiently use the factors of production.

Society and Gov’t. Tradeoffs. Societies and Governments — Tradeoffs involve the questions of : What to produce? How much to produce? This is referred to the Guns or Butter Scenario.

II. OPPORTUNITY COSTS The next best alternative given up when an economic decision is made (SINGLE). _n81QT0 A. Decision Making Grid — A method of breaking down the final decision in order to identify the benefits of each choice. B. Decision Making Grid identifies: 1) Benefits of each choice 2) The opportunity cost 3) The final decision

III. THINKING AT THE MARGIN A decision made by adding or subtracting one smaller unit within the decision. Goes away from the All or Nothing decision. (ONLY AVAILABLE WHEN DECISION CAN BE BROKEN INTO SMALLER UNITS) A. Example — Deciding how to efficiently use 5 hours of time for study and recreation.( See Textbook) B. CANNOT USE THIS CONCEPT WHEN A CHOICE HAS NO WAY TO BE BROKEN INTO SPECIFIC UNITS.

Economic NotesChap.1 What is Economics ? Section 1-3 OVERVIEW-Determining how societies or governments make economic choices, specifically in the area of production. This is done by using graphs because graphs help identify trends.

PRODUCTION POSSIBILITY CURVE / GRAPH Graph is a comparison between any two products, similar to the GUNS OR BUTTER scenario. –THIS SCENARIO DEPICTS THE DIFFERENCE BETWEEN CONSUMER GOODS AND /OR NATIONAL DEFENSE OR CAPITAL GOODS – c&feature=relatedhttp:// c&feature=related David re:

PRODUCTION POSSIBILITY CURVE / GRAPH B. As the production of one product increases, the production of the other will decrease. The identified Opportunity Cost of increasing one product is the decrease of the other product.

II The Production Possibilities Frontier—The line that shows the different levels of production at each stage or after each decision A. Efficiency — Production that maintains or follows the line drawn as the Production Possibilities Frontier. B. Underutilization — any production that falls under or within the line identified as the Production Possibilities Frontier. C. Growth — Due to a change in labor or resources, production exceeds the Production Possibilities Frontier. This is a temporary situation as the Production Possibilities Frontier is redrawn.

III. DEFINING COST TO ECONOMISTS IT ALSO MEANS WHAT HAS TO BE GIVEN UP ALONG WITH CHANGING FINANCIAL COSTS.. The Law of Increasing Costs — When there is a change or increase in production of one product from another there will be an increase in the opportunity costs as production shifts. This increase may be temporary and explains why the Production Possibilities Frontier will curve.

IV. Basic Economic Ideals T.I.N.S.T.A.A.F.L.--(THERE IS NO SUCH THING AS A FREE LUNCH) States that all things have “value” and that value has to be assumed by someone. When you consume food you are using value.

Basic Economic Ideals CYCLE OF A DOLLAR Belief that is an active and healthy economy--every dollar spent theoretically will cycle thru the economy and return to you

RULE OF 72 An investment rule to explain “compound interest” Take the percent of return on your investment (2%) and divide that into the number 72. (36) That will tell you the number of years before a one time investment will double. eAhttp:// eA

Basic Economic Ideals Need for Economic Diversity In order for the economy to grow, there must be people of different economic status. The people are motivated to produce and work in order to improve their economic status! “if everyone was wealthy concept”