Introduction to Economics How we make decisions in a world where resources are limited.

What is economics? The social science that deals with the production, distribution, and consumption of goods and services.

Where did the word “economy” come from? TThe word "economy" can be traced back to the Greek word οικονομία, "one who manages a household", TThe most frequently used current sense, "the economic system of a country or an area", seems not to have developed until the 19th or 20th century.

The Economic Problem  Unlimited Wants  Scarce Resources – Land, Labour, Capital  Resource Use  Choices A wind farm. Copyright: Getty Images, available from Education Image Gallery

Needs vs. Wants NNeeds- items we must have for survival such as food, clothing and shelter. WWants –Things we would like to have such as entertainment, vacations, and other items that make life more comfortable and enjoyable.

The issue of scarcity  Scarcity occurs when we do not have enough resources to produce or obtain all the things we want to have.  Even a country as rich as the United States does not have the resources to produce all of our goods such as cars, houses and clothing and to provide all of our services such as public transportation, education, national defense, entertainment and many others.  Scarcity is the result.

The effects of scarcity  Because of scarcity, we have to make choices among alternatives.  A rational consumer compares prices and makes choices based on his/her limited resources.

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The rational consumer…  Decides whether or not he or she can afford to buy a big car or a small car, own a home or rent, purchase brand name items or generic ones, and so on.

Every economy must solve with three questions: 1.What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing?

How should goods and services be produced?  How should goods and services be produced? – labour intensive, land intensive, capital intensive? Efficiency?

Who should get the goods and services produced?  Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard?

Opportunity Cost  Definition – the cost expressed in terms of the next best alternative sacrificed  Helps us view the true cost of decision making  Implies valuing different choices

Opportunity Cost  If you have basketball practice while your friends are having a party, then the opportunity cost of basketball practice is missing the party.

Trade Offs  This is the alternative you face if you decide to do one thing over another.  If you decide to buy a DVD player, you are exchanging your money for the right to own a DVD player rather than something else that might cost the same amount.

The Measures of Cost  If you own a company that makes and sells bicycle helmets, you may have the feeling that you do not need to produce 100,ooo but you know you could sell more than 10,000. You have to look closely as your c costs of producing the helmets and the amount of revenue ($) you could make.  Fixed Costs  Variable Costs  Total Costs  Marginal Costs  Benefit Analysis

Being an economically smart citizen  We live in a market economy  This is an economic system in which supply, demand, and prices help people make decisions and allocate resources.

A market economy is a participatory economy…why?  The choices you make as a consumer affect the products that businesses make.  Your choices also affect prices businesses charge.  Likewise, products offered and their prices affect the choices you make. or

A market economy is based on capitalism and free enterprise…why?  Under capitalism, private citizens own most, if not all of the means of production.  Under free enterprise, businesses are allowed to compete for profit with a minimum of government interference. Both capitalism & free enterprise describe the economy of the United States.

Define Capitalism  capitalism(n.)An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.

Define Free Enterprise System  Free enterprise system or Free enterprise economy, another term for capitalism capitalism

Question 1  Opportunity cost is… a. The price you pay for an item b. the cost expressed in terms of the next best alternative sacrificed c. The interest paid on a loan d. The mortgage paid on a home

Question 2 Economics is… a. The study of people’s needs and wants b.The social science of the production, distribution, and consumption of goods and services c.The choices you make as a consumer & how they affect the products that businesses make d.The study of the market economy

Question 3 Free enterprise can best be defined as… a.Socialism in practice b.Communism in theory c.Darwinism in effect d.Capitalism in practice

Question 4 The United States is a ______ economy based on _______. a.Traditional, customs b.Market, capitalism c.Command, government control d.Mixed, international trade

Question 5 Trade offs are a.The car you swap in when you buy a new one b.the alternative you face if you decide to do one thing over another c.The money you save when you trade in vehicles d.The loss you take on a new loan

Question 6 Society has virtually unlimited wants… a.And unlimited resources b.But limited resources c.In a modern world with unlimited cash d.But limited choices to make correctly