Chapter 1 What is Economics?

Section 1: An Economic Way of thinking. Objectives: What is economics? What are the factors of production? What is the goal of entrepreneurship?

What is economics? Economics-The study of the choices that people make to satisfy their wants and needs. What are examples of your wants and needs? Needs-Food, Shelter, Clothes. Wants-Cars, PS3, CDs

Economic Classifications Economists split the study of economics up into two categories: Microeconomics: The study of the choices made by economic actors such as households, companies, and individual markets. Focuses more on the impact of individual’s on the economy.

Economic Classification Macroeconomics-is the study of entire economies. Focuses more on the bigger picture such as the entire economy of the United States instead of how individual’s behavior affects the economy.

Economic Decisions Who makes decisions in the economy? You do as well as the people around you. How do you and others make economic decisions? You decide what to buy and what not to buy. Others may decide what to sell, how much to sell, and how much to sell it for.

Economic Decisions Two categories of decision makers: Consumers-The people who decide to buy or not to buy things. Producers-The people who make things to satisfy the needs and wants of the consumers.

Consumer Decisions Again, consumers make decisions to satisfy their wants and needs. What do consumers purchase? Goods-physical objects that can be purchased. Services-actions or activities that are performed for a fee. What are examples of goods and services?

Economic Resources Resource-anything that people use to make or obtain what they need or want. Resources that are used to produce goods and services are called factors of production.

Factors of Production There are four types of factors of production: 1. Natural Resources-items provided by nature that can be used to produce goods and to provide services. -Examples of natural resources are wood, gold, steel, iron, coal, and oil. -A natural resource is only considered a factor or production when it is scarce and must be bought.

Factors of Production 2. Human Resources-Any human effort exerted during production. -Effort can be either physical or intellectual. -Example: The physical effort it takes you to flip the burger at Hardee’s or the intellectual effort it takes you to make the correct incision in the operating room.

Factors of Production 3. Capital Resources-The manufactured material used to create products. -Includes buildings, structures, machinery, and tools used in production. These types of capital resources are called Capital Goods. -The finished product made by using the capital goods are called Consumer Goods. -Money used to buy all the capital goods is also considered to be a capital resource.

Factors of Production 4. Entrepreneurship-The combination of organizational abilities and risk taking involved in starting a new business or introducing a new product. -Actual person who does this is called an entrepreneur. They risk financial failure in hopes of financial gain. -Who are examples of entrepreneurs in Williston?

Section 2: Scarcity and Choice Objectives: Why is scarcity a basic problem of economics? What issues must producers address to distribute resources? Why do producers study productivity?

Scarcity Scarcity-the combination of limited economic resources and unlimited wants. Scarcity is said to be the basic problem of economics because it forces people to make decisions about how to use resources effectively. How do natural disasters or wars cause scarcity?

Basic Economic Questions There are three basic economic questions that must be answered so that resources can be allocated (distributed) effectively: 1. What to Produce? 2. How to Produce? 3. For Whom to Produce?

Productivity Once the basic economics questions are answered, economists look to see if they resources being used are being used efficiently. Economists study efficiency by looking at productivity-the level of output that results from a given level of input.

Productivity Example: Dixie-Narco employs 500 people to produce 1000 vending machines per week. Dixie-Narco’s productivity is two vending machines per employee per week. To increase productivity employers can introduce a division of labor where employees can specialize in a particular task. Example: Create an assembly line where each employee is responsible for one particular area of the assembly process.

Section 3-Opportunity Costs Objectives: Why is sacrifice an important element of economic choice? What assumptions are involved in creating a production possibilities curve? Why might future production possibilities differ from current production possibilities?

Trade-Offs and Opportunity Costs Trade-off: the sacrifice of one good to purchase or produce another good. Opportunity cost-the value of the next best alternative that is given up to obtain the preferred item. Or in other words, what you give up to get something. Example-Uncle Rico has enough money to either buy a time machine or pay his rent. Uncle Rico decides to pay his rent. The trade-off is the decision he has to make on how to spend his money. If he decides to pay his rent, then his opportunity cost is that he will not be able to buy the time machine and go back in time to win the State Championship in football.

Production Possibilities Curve Production Possibilities Curve-shows all of the possible combinations of two goods or services that can be produced within a stated time. A PPC is based on two assumptions: 1. The amount of available resources and technology will not change during the period being studied. 2. All of the natural, human, and capital resources are being used efficiently. P. 13 Figure 1.3 Shifts in the curve, p. 14 Figure 1.4.

Section 4-Exchange Objectives: What are the difficulties associated with barter? Why is true self-sufficiency rare? What are the economic benefits of interdependence ?

Forms of Exchange Barter-the exchange of one set of goods for another. -There is a difficulty in bartering because it relies on bargaining and often requires complex transactions among multiple parties.

Forms of Exchange Money-any item that is readily accepted by people in return for goods and services. Money has three functions. It serves as: 1. a standardized item that is generally traded for goods and services. 2. a measure of value that allows both producers and consumers to determine and express worth. 3. a store of value that can be saved and used to purchase items at a later date.

Forms of Exchange Credit-allows consumers to use an item before completely paying for it. Payments are usually made over a period of time. If payments are not made, item can be reclaimed by the producer.