Basic Economic Concepts Unit 1

What is Economics Wants – desires that can be satisfied by consuming a good or service. Needs – Items needed for survival. Scarcity – When not enough resources exist to satisfy wants and needs. Economics is the study of how wants and needs are satisfied with limited resources.

Scarcity The scarcity of resources leaves us with three key questions: What will be produced? How will it be produced? For whom will it be produced?

California Drought http://www.dailymail.co.uk/news/article-2569919/Shocking-pictures-California-drought-reveal-extent-dry-spell-relief-way.html

California Drought Who uses water Who should get preference? Why?

Factors of Production Land – Natural resources consumed in production Labor – Time and effort used to produce goods and services Capital – Resources made and used to produce and distribute goods and services. These resources are not consumed in the production . Includes both physical capital (tools and machines) and human capital (job training). Entrepreneurship - Combines the other three factors of production in making a business. This involves vision, risk, skill and ingenuity.

Choice Choice – Because of scarcity, we are all forced to make choices. Incentives – Methods used to encourage choice Utility – Benefit or satisfaction gained from using a good or service Opportunity Cost – The value of something that is given up when a choice is made. Marginal Cost – The additional cost of using one more unit of a product. Marginal Benefit – The additional satisfaction from using one more unit of a product. Always understand there is no such thing as a free lunch. Even a lunch that didn’t cost you any money still comes with costs. To understand why a choice is made, an economist must understand all the costs and benefits associated with the choice.

Choice Write the answer to the following question down: 1. What did you eat for lunch? 2. Why did you choose that? 3. What was your second choice? 4. Why didn’t you choose that? 5. Answer the same questions about your cell phone.

Demand Demand – desire to have a good or service and pay for it. Law of Demand – When prices go down, quantity demanded will rise. When prices go up, quantity demanded will go down. Supply and demand are usually shown on a graph, because of this economists often refer to the supply curve and demand curve. Law of diminishing marginal utility – the marginal benefit from using each additional unit of a good or service during a given time tends to decline as each is used. Normal goods – goods who’s demand increases when income rises. Inferior goods – goods who’s demand decreases when income rises. Elasticity of demand – measures how responsive demand is to change in price. Elastic goods – significant change in demand with change in price. Inelastic goods – little change in demand with change in price. Usually items with no substitute and are not a luxury.

Supply Supply – the desire and ability to produce and sell a product. Law of Supply – When price decreases the quantity supplied will decrease. When price increases the quantity supplied will increase.

Supply - Labor Marginal Product – change in total out brought about by adding workers. Specialization – having a worker focus on one part of production Increasing returns – additional workers increase marginal product Decreasing returns – additional workers decrease marginal product

Supply – Cost Fixed Cost – Costs that are stable regardless of output Variable Cost – these costs fluctuate based on level of production Total cost – sum total of all costs Marginal cost – the additional cost it takes to produce one more unit. Input costs – the cost of resources to make products Excise tax – tax placed on the production or sale of a specific good or service. Subsidy – financial incentive provided by the government for providing a specific good or service