What is Economics? Chapter 1

Scarcity and the Science of Economic The Fundamental Economic Problem Scarcity - Video (3 min) fundamental economic problem facing all societies; not having enough resources to satisfy all wants and needs Needs and Wants Need – basic element for survival Want – everything else TINSTAAFL Three Basic Questions WHAT to produce? HOW to produce? FOR WHOM to produce?

Scarcity

The Factor of Production Land – “gifts” of nature Labor – people with all their abilities and skills Capital – tools, equipment, machinery in the production of goods/services Entrepreneurship – someone willing to take a risk The Scope of Economics Description (ex. GDP) Analysis (ex. How do taxes affect people) Explanation Prediction

Basic Economic Concepts Goods, Services and Consumers Goods Consumer goods Durable goods Nondurable goods Services Goods are tangible items you can touch and feel Haircuts, home repair, servers, teachers, etc. Consumers People who use goods and services to satisfy their needs and wants

Value, Utility and Wealth OR Value, Utility and Wealth Paradox of Value Adam Smith noticed that some necessities such as water and air have very low monetary value. Some nonessentials, such as diamonds have a high value. Utility For something to have value, it must have utility. Being useful and giving satisfaction; very subjective Value For something to have monetary value, it must be scarce and have utility. Being useful and giving satisfaction; very subjective Wealth The accumulation of products that are tangible, scarce, useful and transferable from person to person

The Circular Flow of Economic Activity Markets allow buyers and sellers to exchange a specific product. Markets may be local, national, or global – can exist in cyberspace Factor markets (factors of production are bought and sold) Product markets (After income is earned, consumers spend money on products)

Productivity and Economic Growth Goes up whenever more can be produced w/ same amount of resources Investing in Human Capital Sum of peoples skills, abilities, health, knowledge and motivation Individuals can invest in themselves - college Division of Labor and Specialization – Each worker completes a part of the sum A worker becomes highly skilled in a certain area Economic Interdependence We rely on others, others rely on us

Economic Choices and Decision Making Trade-offs and Opportunity Cost Trade-Off – alternative that is available whenever a choice is to be made Opportunity Cost – cost of the next best alternative use of money, time, or resources when making a choice

Opportunity Cost

Production Possibilities Production possibilities frontier – is a diagram representing various combinations of goods and services an economy can produce when all its resources are in use.