What is Economics? McFarland

Economics The study of choices that people make to satisfy their needs and wants.

NEEDS What is needed for survival. –Food –Clothing –Shelter –Water

WANTS Beyond what is needed for survival. –Televisions –Magazines –Phones –Radios

Economist A person who studies economic choices.

2 Categories of Economics Microeconomics – –The study of a single factor of an economy – such as individuals, households, businesses, and industries – rather than an economy as a whole. Ex. – Exxon corp. Macroeconomics –The study of an entire economy or one of its principal sectors. Ex.- unemployment

As you will see, you already understand economic concepts, even if you think of economics as an unfamiliar subject. Whether you realize it or not, you take economic action every day in the things you chose to buy.

2 Large economic decision makers. Consumers – –The people who decide to buy things. Producers – –The people who make the things that satisfy consumers’ needs and wants.

Goods Physical objects that can be purchased. –Ex. – iPods, shoes, etc.

Services Actions or activities that are performed for a fee. –Ex. – lawyers, sales person, plumbers, etc.

Economic Resource Anything that people use to make or obtain what they need or want.

Factors of Production Resources that can be used to produce goods and services are called Factors of Production – often divided into 4 categories.

Factors of Production 1.) Natural Resources –items provided by nature found on or in the Earth. –Ex. – oil fields in Oklahoma, trout-filled rivers in Montana, coal mines in Kentucky. 2.) Human Resources – any human effort exerted during production – can be physical or intellectual. –Ex. – assembly line workers, ministers

Factors of Production 3.) Capital Resources – the manufactured materials used to create products – includes capital goods (buildings, tools used in production) and money - the finished products that people buy are called consumer goods.

Factors of Production 4.) Entrepreneurship – the organizational abilities and risk taking involved in starting a new business or introducing a new product – the goal is to create something of value – a person who attempts to start a new business is called an entrepreneur.

Because resources (money) are limited, people are forced to make an economic decision. -i.e. to choose how to spend their money.

FACT All resources are limited – However, people’s wants are unlimited.

Scarcity The combination of limited economic resources and unlimited wants results in a condition known as scarcity, which is the most basic problem of economics.

Limited amounts of products require people to make decisions – people decide how to allocate, or distribute, resources in order to satisfy the greatest number of needs and wants – to allocate resources effectively, an economic system or a society must address 3 basic economic questions.

3 Basic Economic Questions 1.) What to produce? –A society’s needs and wants can never be met completely, so they must determine what is more important. Ex. – new school or more busses

3 Basic Economic Questions 2.) How to produce? –What method(s) will be used Ex. – hammer or nail gun

3 Basic Economic Questions 3.) For whom to produce? –How to distribute the goods and services. Ex. – who will attend the new school

After choosing what, how, and for whom, to produce, a society must carry out these decisions – tries to make sure that its resources are used as effectively as possible.

Productivity Productivity – the level of output that results from a given level of input. –Ex. – Sleepy Time clock company employs 100 people to build 1000 clocks per week – in this case the productivity is 10 clocks per employee per week (1000/100 = 10).

Trade-off & Opportunity Cost One good may sometimes be sacrificed for another – this sacrifice is called a trade-off The cost of this trade-off is the value of the next best alternative given up to obtain that item – that is called the opportunity cost.

People face trade-offs and opportunity cost everyday. Ex. – Jamie has two events she would like to attend in the same week. (concert, UK basketball game). Tickets for the concert and the game cost the same amount, but she only has enough money to buy one ticket. She must make a trade-off because she can’t afford to buy both. If she buys the concert ticket, the alternative choice (game), is the opportunity cost of buying the concert ticket.

Production Possibilities Curve Shows all of the possible combinations of 2 goods or services that can be produced within a stated time period, given 2 assumptions. –Available resources and technology will not change –All of the natural, human and capital resources are being used in the most efficient manner.

Production Possibilities Curve KEY POINTS: Combinations that lie inside the curve represent an inefficient use of existing resources. Combinations that lie outside the curve represent production impossibilities. Each combination is measured in terms of production cost – in other words more of one good can be produced only by making less of the other good.

Work Sheet

Exchange Process in which producers and consumers agree to provide one type of item in return for another.

3 Types of Exchange Barter – the direct exchange of goods and services without the use of money. – ex. Turkey sandwich for a carton of milk Money – any item that is accepted by people in return for goods or services. – Ex. Bills, coins, precious metals, salt, beads, etc. Credit – allows the consumers to use items before completing payments for the item. – Ex. House and car loans, credit cards

Value The worth of the good or service for exchange purposes. Needs usually have a lower value than wants. –Ex. Diamonds cost more than water.

Value Value is effected by –Scarcity –Utility – the usefulness to a person.