Basic Economics 13th Edition Frank V. Mastrianna © 2003 South-Western College Publishing Company

Chapter 1 The Nature and Scope of Economics

3 Economics Defined  How people and institutions make choices  How the choices determine how resources are used

4 Economics as a Science  Organized body of knowledge  Coordinated, arranged, and systematized according to general laws and principles  Social science  Study of the behavior and interactions of human beings as individuals and in groups

5 Economic Theory and Policy  Economic Theory  Develops rules and principles  Guide for action under a given set of circumstances  Economic Policy  What is actually done under a given set of circumstances  Political, military, and social aspects

6 Production  Production  Creation or addition of utility  Utility  Utility  ability of a good or service to satisfy a want  Total Product  Total Product  sum of all goods and services produced by an economy over a given period of time

7 Distribution  Distribution  Allocation of the total product among productive resources  Monetarily  distribution of money incomes among the owners of the productive resources

8 Productive Resources  Inputs or resources necessary before a person or business can engage in the production of a good or service  Labor  Labor  time and effort expended by human beings involved in the production process  Land  Land  the resources of the land, sea, and air  Capital  Capital  goods used to produce other goods and services  Enterprise  Enterprise  act of organizing and assuming the risk of a business venture  Entrepreneur  Entrepreneur  person who organizes and assumes risks

9 Functional Distribution of Income RESOURCES Labor Land Capital Enterprise TYPES OF PAYMENT Wages Rent Interest Profits TOTAL PRODUCT

10 Positive and Normative Economics  Positive economics  Economics of what is  Relationships that are verifiable  Normative economics  Economics of what ought to be  Combines economics and politics and policy

11 Consumption  Use of a good or service  Ultimate end of economic activity  Production and distribution driven by consumption desires

12 Goods and Services  Free good Consumer goods Capital goods Public good

13 Economic Good  Object or service  Utility  Scarce  Transferable  Scarcity  Not a sufficient amount available to meet everyone’s wants  Price has to be paid to obtain the good or service  Greater the scarcity, the greater the value or price

14 Free Goods and Public Goods  Free Good  Good that lacks the element of scarcity  no price  Public Good  Economic good to the supplier  Free to the user  Public parks, libraries, and the interstate highway system

15 Consumer and Capital Goods  Consumer Goods  Goods that are directly used by the consuming public  Books, paper, food, clothing  Capital goods  Goods used to produce other consumer or capital goods  Buildings, machinery, equipment  Durable and non-durable

16 Wealth and Income  Wealth  Value of things at a particular time  Human capital  the stock of labor talents and skills used to increase productivity  Total income  the total value of the goods and services produced over a period of time (usually 1 year)

17 Micro and Macroeconomics  Microeconomics: deals with the economic problems of the individual, the firm, and the industry  Macroeconomics: deals with the aggregates of economics - total production, total employment, and general price level