What is Economics?

Definition: study of how individuals & societies make choices about ways to use scarce resources to fulfill their wants

Wants vs. Needs Wants: anything other than what is needed for basic survival Needs: things required for basic survival (Food, Clothing, Shelter)

Wants vs. Needs Example: In 1901, people discovered oil in Texas – but they were actually looking for water. Disappointed, they offered to trade the oil for water at a ratio of 1:1 (1 barrel of oil for each barrel of water).

Problem of Scarcity Scarcity is THE fundamental problem in economics Maintains that all resources are limited People will compete for these limited resources Scarcity exists because people cannot satisfy their every want

Factors of Production Definition: what goes into producing a product 4 Factors of Production: 1.Capital: previously manufactured goods used to make other goods & services 2.Entrepreneurship: ability of individuals to start new businesses & develop new products; Risk- taker; lemonade stand example 3.Land: natural resources & surface land & water 4.Labor: human effort directed toward production

3 Basic Questions??? 1.What should be produced? – Always a Trade off – Ex. More $$$ on roads = less $$$ for salt in the winter 2.How should it be produced? – Always look for Profit Maximization – Ex. Jobs overseas, Pink slime 3.For whom should it be produced? – In the US we use a Price System – Can everyone afford a Ferrari? – NOT A CHANCE! Only high-rollers like Mr. Green

Supply & Demand Is what determines this price system Demand: represents a consumer’s willingness and ability to pay; how we define this is with... Law of Demand: As price goes up, quantity demanded goes down; as price goes down, quantity demanded goes up

Supply & Demand Factor effecting quantity demanded of a product: – Real Income: people are limited by income as to what they can buy; only a few that can afford a Ferrari – Substitution Effect: people can replace one product with another if it satisfies the same need – Diminishing Marginal Utility: how one’s additional satisfaction for a product lessens with each additional use/purchase of it

Supply & Demand Supply: willingness and ability of producers to provide goods and services Law of Supply: As prices increase, the quantity supplied increases, as prices decrease, the quantity supplied decreases

Supply & Demand Factors Determining Supply: Price of Inputs: how much it costs to produce the product Number of firms in the industry: competition; more = more supply; less = less supply Taxes: increase = reduction of supply (not making as much money off product) Technology: increase can reduce cost of production and increase supply

Putting Supply & Demand Together Equilibrium Price: point at which quantity demanded & quantity supplied meet Shortage: causes prices to rise, while a Surplus causes prices to drop…Why??? Price Ceiling: prevents prices from going above a specified amount; Ex. Rent in NYC Price Floor: prevents prices from dropping too low; Ex. Minimum wage