The Basic Problem in Economics Chapter 1, Section 1 The Basic Problem in Economics

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.

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.

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.

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.

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.

Section 2 Trade 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?

Opportunity costs What is the opportunity costs for the War in Iraq? 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.

Section 3 What 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.

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.