Introduction to Economics

What Is It? Economics – the study of how people try to satisfy what appear to be unlimited and competing wants through the careful use of relatively scarce resources Scarcity – the condition that results from society not having enough resources to produce all the things people would like to have

Three Basic Questions What to Produce – guns or butter? How to Produce – should we have slavery? Environmental laws and regulations? Child labor? Balance between expenses and benefits. For Whom to Produce – how do we allocate the products of the economy, and what principles do we use? Should moral or practical considerations take precedence?

Factors of Production Resources required to produce the stuff we would like to have Four Sources: Land – includes any natural resources Capital – includes: 1.Financial capital – money used to buy tools, equipment, etc. 2.Capital goods – tools, equipment, machinery, factories, etc. Labor – inclusive of all workers, with the exception of… Entrepreneurs – risk-taker in search of profits who does something new with existing resources

Production The process of creating goods and services Can only take place after you have land, capital, labor, and entrepreneurs

The Scope of Economics Four key elements: Description – how things are. Most important measure is Gross Domestic Product (GDP): dollar value of all final goods, services, and structures produced within a nation’s borders within a year Analysis – attempt to answer the question of “why” Explanation – communication of analysis to others in the hope of being able to address future problems Prediction – we want to see what is coming down the road and adjust accordingly

The Vocabulary of Economics Economic products – goods and services that are useful, relatively scarce, and transferable to others Goods – an item that is economically useful or satisfies an economic want Consumer good – intended for final use by individuals Consumer good – intended for final use by individuals Capital good – a good used to produced other goods (think factory machinery) Capital good – a good used to produced other goods (think factory machinery) service – work that is performed for someone consumer – a person who uses goods and services to satisfy wants and needs

The Vocabulary of Economics value – a worth that can be expressed in dollars and cents Paradox of value – situation where some necessities, such as water, have little monetary value, whereas some non- necessities, such as diamonds, have a much higher value utility – the capacity to be useful and provide satisfaction

The Vocabulary of Economics Generally, value is determined by utility and scarcity (we do not yet have to employ practically enslaved 10 year-olds to mine water) wealth – the accumulation of those products that are tangible, scarce, useful, and transferable from one person to another.

The Circular Flow of Economic Activity Market – location or other mechanism that allows buyers and sellers to exchange economic products Factor markets – markets where productive resources are bought and sold (remember our four factors?) Product markets – markets where producers sell their goods and services to consumers

Productivity and Economic Growth Economic growth – occurs when a nation’s total output of goods and services increases over time. Productivity is the most important factor in increasing growth. productivity – measure of the amount of output produced by a given amount of inputs in a specific period of time

Division of Labor and Specialization Division of labor – when work is arranged so that individual workers do fewer tasks than before Specialization – factors of production perform tasks that they can do relatively more efficiently than others

Human Capital and Interdependence Human capital – the sum of the skills, abilities, health, and motivation of people Government – can provide education and healthcare Business – can invest in training and other programs that improve the skill and motivation of its workers Individuals – can invest in their own education by completing high school, going to technical school, or going to college Economic interdependence – we rely on others, and others rely on us, to provide the goods and services that we consume

Economic Choices and Decision-Making Trade-offs – alternative choices; doing one thing necessarily means you cannot spend that time doing something else Opportunity cost – cost of the next best alternative use of money, time, or resources when one choice is made

Production Possibilities Production possibilities frontier – diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed

Thinking Like an Economist Building Models – a model is a simplified theory or a simplified picture of what something is like or how something works. Models are based on assumptions, things we take for granted as true. Quality of the model depends on the quality of the assumptions What is a rational choice?