Basic Economics 14th Edition Frank V. Mastrianna Copyright (c) 2007 by Thomson South-Western. All rights reserved.

Chapter 1 The Nature and Scope of Economics

3 Economics Defined  How people and institutions within a society make choices  How the choices determine the use of society’s resources

4 Economics as a Science  An organized body of knowledge  Coordinated, arranged, and systematized according to general laws and principles  Social science  A study of the behavior and interactions of human beings as individuals and in groups

5 Economic Theory and Policy  Economic theory  Develops rules and principles  A guide for action under a given set of circumstances  Economic policy  Action actually taken under a given set of circumstances  Commonly modified by political, military, and social aspects

6 Production  Production  The creation or addition of utility  Utility  the ability of a good or service to satisfy a want  Total product  the sum of all goods and services produced by an economy over a given period of time

7 Distribution  Distribution  The allocation of the total product among the productive resources  Monetarily  the distribution of money incomes among the owners of the productive resources

8 Productive Resources  Inputs or resources necessary before a person or business can engage in the production of goods or services  Labor  the time and effort expended by human beings involved in the production process  Land  the resources of the land, sea, and air  Capital  goods used to produce other goods and services  Enterprise  the act of organizing and assuming the risk of a business venture  Entrepreneur  a person who organizes and assumes the risk of a business venture

9 Functional Distribution of Income RESOURCES Labor Land Capital Enterprise TYPES OF PAYMENT Wages Rent Interest Profits TOTAL PRODUCT

10 Positive and Normative Economics  Positive economics  The scientific study of “what is” among economic relationships  Concerns matters that are the result of investigations that are verifiable  Normative economics  The area of economics dealing with what ought to be  Combines economics and politics and policy

11 Consumption  The use of a good or service  The ultimate end of economic activity  Production and distribution are driven by consumption desires

12 Goods and Services Consumer goods Capital goods Public good Free good

13 Economic Goods  An object or service  Utility  Scarce  Transferable  Scarcity  Not a sufficient amount available to meet everyone’s wants  A price has to be paid to obtain the good or service  The greater the scarcity of an economic good, the greater its value or price

14 Free Goods and Public Goods  Free good  A good that lacks the element of scarcity  no price  Public good  An economic good to the supplier  Free to the user  Public parks, libraries, and the interstate highway system

15 Consumer and Capital Goods  Consumer goods  Goods that are directly used by the consuming public  Books, paper, food, and clothing  Capital goods  Goods used to produce other consumer or capital goods  Buildings, machinery, and equipment  Durable and nondurable

16 Wealth and Income  Wealth  Things of value owned at a particular time  Human capital  The stock of labor talents and skills used to increase productivity  Total income  The total value of the goods and services produced over a period of time (usually 1 year)

17 Microeconomics and Macroeconomics  Microeconomics  Deals with the economic problems of the individual, the firm, and the industry  Macroeconomics  Deals with the aggregates of economics including total production, total employment, and general price level