ECONOMICS NOTES Chapter 1 Chapter 1

What is the basic economic problem? SCARCITY

Scarcity Scarcity exists because of unlimited wants and needs with limited resources available Scarcity exists because of unlimited wants and needs with limited resources available

How can we deal with scarcity? Legally 1. Rationing 2. Substitution 3. Trade 4. Locate other Sources 5. Create Alternatives

PPV (People Powered Vehicle) from the 1970’s

Illegal 1. Theft 2. Blackmarket 3. Counterfeit

Economics – The Study of how goods and services are produced, distributed and consumed Economics – The Study of how goods and services are produced, distributed and consumed Good – tangible products Good – tangible products Service – intangible items of value Service – intangible items of value ex. - haircut, oil change, education ex. - haircut, oil change, education Production – creation of goods and services Production – creation of goods and services

Basic Economic Questions: What? To produce What? To produce How? To produce it How? To produce it For Whom? Who benefits from the production For Whom? Who benefits from the production

Factors of Production – resources necessary for production to take place Land – natural resource Land – natural resource ex. Tree in the forest, coal in the ground ex. Tree in the forest, coal in the ground Labor – human resource Labor – human resource ex. Person cutting down the tree ex. Person cutting down the tree Capital – man made resource Capital – man made resource ex. The tree after it is cut down ex. The tree after it is cut down Entrepreneurship – organizational resource Entrepreneurship – organizational resource ex. The person who decides what trees are cut, hires the workers, and oversees the production. ex. The person who decides what trees are cut, hires the workers, and oversees the production.

Financial Capital – money used to buy products Financial Capital – money used to buy products Capital goods – tools, equipment or other manufactured goods used to produce other goods/services. Capital goods – tools, equipment or other manufactured goods used to produce other goods/services.

Model – tool used by economists to make predictions ex charts, graphs, diagrams Model – tool used by economists to make predictions ex charts, graphs, diagrams Data – factual information Data – factual information Predictions – educated guesses based on data * the more data, the more accurate the predictions Predictions – educated guesses based on data * the more data, the more accurate the predictions

Division of Labor – dividing up jobs into specific tasks ex assembly Line Division of Labor – dividing up jobs into specific tasks ex assembly Line which leads to which leads to Specialization – becoming skilled at a specific task ex. Teacher, electrician, auto mechanics etc. Specialization – becoming skilled at a specific task ex. Teacher, electrician, auto mechanics etc. Which leads to Which leads to Specialized Capital – tools used for a specific task ex. X-ray machine, hydraulic lift Specialized Capital – tools used for a specific task ex. X-ray machine, hydraulic lift Wealth – accumulation of goods and/or resources Wealth – accumulation of goods and/or resources

Economic Interdependence – economic activities in one part of the country or world affects what happens elsewhere, work in your specialty and you are dependent on others to provide your other needs. Economic Interdependence – economic activities in one part of the country or world affects what happens elsewhere, work in your specialty and you are dependent on others to provide your other needs. Income – flow of value Income – flow of value You do not have to have a high income to become wealthy, and if you have a high income it does not guarantee that you will be wealthy You do not have to have a high income to become wealthy, and if you have a high income it does not guarantee that you will be wealthy

Trade-Off – giving up one thing in exchange for something else Opportunity Cost – the value of the item you give up when a choice or decision is made Opportunity Cost – the value of the item you give up when a choice or decision is made Example – Next year you have the choice of going to work or going to college. Example – Next year you have the choice of going to work or going to college. If you choose to go to college, what is your opportunity cost? If you choose to go to college, what is your opportunity cost? –The money you would earn working. If you choose to work instead, what is your opportunity cost? If you choose to work instead, what is your opportunity cost? –The increased earnings you will have in the future.

Rational Choice – giving up something of lesser value in exchange for something of greater value Utility – usefulness of an item Utility – usefulness of an item

Market – where products and resources are bought and sold Factor Market – where the 4 factors of production are bought and sold Factor Market – where the 4 factors of production are bought and sold Product Market – Market where all final goods/services are bought and sold Product Market – Market where all final goods/services are bought and sold

Circular Flow Chart – Diagram of the economy that shows the flow of goods, services, resources and value Product Market Households Factor Market Factories or Firms

What is missing? Where else would your money go? Banks, government, other countries in trade

Graphs: X axis is the horizontal axis X axis is the horizontal axis Y axis is the vertical axis Y axis is the vertical axis A graph is a model not reality, because it can not include all of the factors. A graph is a model not reality, because it can not include all of the factors.

Production Possibilities Frontier Graph – is a graph that shows the different combinations of 2 products produced from the 4 factors of production available Production Possibilities Frontier Graph – is a graph that shows the different combinations of 2 products produced from the 4 factors of production available Sample Graph Sample GraphData: Combinations Radio TV A 6000 TV B B C D Radio Radio

If production appears inside the production possibilities frontier (pt p) this means? If production appears inside the production possibilities frontier (pt p) this means? –the firm is not using all of it’s factors of production OR OR –it is not using it’s resources efficiently Production represented by the curve is at maximum efficiency Production represented by the curve is at maximum efficiency Production can not take place outside the frontier at this time. In order for production to take place outside the frontier in would require... Production can not take place outside the frontier at this time. In order for production to take place outside the frontier in would require... –More resources Or Or –New technology

Decision Making Process: The 5 steps include: The 5 steps include: Define the problem Define the problem list alternatives (choices) list alternatives (choices) List Criteria (priorities or what is important to you) List Criteria (priorities or what is important to you) Evaluate (+means it meets the criteria, - means it does not) Evaluate (+means it meets the criteria, - means it does not) Make a decision Make a decision

Sample: What college should I attend?