Economics 120 Unit 1 – Introduction and Terminology

Economy... The word economy comes from a Greek word for “one who manages a household.”

What is Economics? Dictionary: “The science that deals with the production, allocation, and use of goods and services.” Economics definition: The study of how we make decisions regarding the use of our scarce resources.

Microeconomics vs Macroeconomics Microeconomics focuses on the individual parts of the economy. –How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole. –How the markets, as a whole, interact at the national level.

Scarcity Dictionary definition: “an insufficient amount or supply” Economics definition: anything that has a limited supply or an item has more than one valuable use.

Examples Time – only 24hrs in a day Money – most people have a limited supply Space – land for farmers, space in a store

Economists study… How people make decisions. How people interact with each other. The forces and trends that affect the economy as a whole.

Resources Land (or Natural resources) –“free gifts of nature” that are useful in producing the goods and services that people want –Examples: land mass and natural resources such as minerals, wild animals, vegetation and water.

Resources Labour (or Human resources) –the number of people in Canada –the variety of skills –level of education –technical training of the population –Examples: labourer, teacher

Resources Capital –Items that are used in the production in other goods and services that goes to the final consumer. –Examples: Factories, machines, tools

Goods and Services Goods includes things that are used or consumed. (tangible) –Examples: clothes, cars, houses, CDs Services are work done for others. (intangible) Consumed at the time of purchase. –Examples: getting a hair cut, oil change

Goods and Services Capital goods: real products that are utilized in the production of other products but are not incorporated into the other products themselves –Factories, machinery, tools Consumer goods: ultimately consumed rather than used in the production of another good. –Car, pencil, textbook

Economic Goods vs Free Goods Free goods are not scarce and have no opportunity cost. –Example: air Economic goods are scarce and involve a cost (financial or opportunity).

Needs vs Wants Needs would be defined as goods or services that are required. Examples: food, clothing, shelter, health care Wants are goods or services that are not necessary but that we desire or wish for. Examples: toys, entertainment, gems

Direct Costs The out-of-pocket expenses that are required to do something Example: deciding to attend college involves expenses such as paying for tuition, books and supplies, rent, utilities…

Opportunity Costs The value of the best possible alternative that is given up. Every time you spend money you incur not only a direct cost but also an opportunity cost as well!

Opportunity Costs Let's think about the opportunity cost of going out to lunch. If the cost of the lunch was $20, you gave up the opportunity to buy $20 worth of other things. Let's say that you have a new CD, a new shirt, and a new book on your wish list, each of which costs about $20. Are all of these the opportunity cost of your lunch? Not really, since only one of these items could be bought with the $20 spent on going out to lunch. If the CD is highest on your wish list, then the CD is the opportunity cost of lunch.

Total Cost Sum of the direct cost and opportunity cost. Example: Buying a car for $8000 Direct cost of buying car = $8000 Opportunity cost (if money invested at 5% a year) = $400 Total Cost = $ $400 = $8400