1. Unit 1 Objectives After studying this unit, students will be able to:
Define economics and its fundamental principles
Differentiate between traditional, command, market, & mixed economies
Identify the major types of business organizations in the United States
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2. Section 1 Scarcity and the Science of Economics
What is Economics?
Section 1
Scarcity and the Science of Economics
The study of economics helps us in many ways, especially in our roles as individuals as members of our communities, and as global citizens.
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3. Fundamental Economic Problem
Scarcity
A condition that results from society not having enough resources to produce all the things people would like to have
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4. Economics
Study of how people try to satisfy unlimited wants through the use of scarce resources
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5. Needs & Wants
Needs – basic requirements for survival (food, clothing, & shelter)
Wants- something we would like to have but is not necessary for survival
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6. TINSTAAFL There is no such thing as a free lunch Resources are limited
Everything we do has a cost…someone has to pay
#3 even if it seems like we are getting something “for free”
I.E. Even if someone gives you a free meal you have to give up your time. Another example, if you receive a coupon for a free meal, the business has to pay for the resources that went into the meal
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7. Three Basic Questions WHAT to Produce HOW to Produce
For WHOM to Produce
First…because we live in a world of relatively scarce resources, we have to make careful economic choices about the way we use these resources
I.e. should a society direct most of its resources to the production of military equipment or to other items such as consumer goods?
Should factory owners use automated production methods that require more machines and fewer workers, or vice versa
Who will receive the things produced?
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8. Factors of Production
Productive resources that make up the following four categories:
Land
Labor
Capital
Entrepreneurs
Refers to natural resources or other “gifts of nature” not created by human effort
A human resource…people with all their efforts, abilities, and skills except for entrepreneurs
Tools, equipment, & factories used in the production of goods & services
Risk-taking individual in search of profits…these people are innovative and responsible for much of the change in our economy
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9. Gross Domestic Product (GDP)
Dollar value of all final goods & services produced within a country’s borders during a one-year period
The most common measure of a country’s total output
A key measure of a nation’s economic health
Last…Economics also describes jobs, prices, trade, taxes, & government spending
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10. Basic Economic Concepts
Section 2
Economics is concerned with economic products—goods & services that are useful, relatively scarce, and transferable to others. Economic products help us satisfy our wants needs. Because they are both scarce & useful, they command a price.
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11. Goods
Tangible economic product that is useful, relatively scarce, and transferable to others
Capital Goods
Consumer Goods
2. When manufactured goods are used to produce other goods & services, they are called capital goods (i.e. an oven in a bakery)
3. Goods intended for final use by individuals
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12. Durable vs. Nondurable Goods
A good that lasts at least three years when used regularly
Nondurable
An item that wears out or lasts fewer than three years when used on a regular basis
I.e. cars
i.e. food, clothing, etc.
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13. Service Work or labor performed for someone
i.e. haircuts, doctors, lawyers, etc.
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14. Value Monetary worth of a good or service as determined by the market
Expressed in dollars & cents
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15. Paradox of Value
Apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item
Economists knew that scarcity was necessary for something to have value
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16. Utility
Ability or capacity of a good to be useful & give satisfaction to someone
Utility of a good varies from person to person
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17. Value
For something to have monetary value, it must be scarce and have utility
Diamond water paradox
2. Diamonds are scarce & have utility while water has utility but is not scarce
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18. Wealth
Sum of goods that are scarce, useful, and transferable from one person to another
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19. Circular Flow of Economic Activity
Market
meeting place that allows buyers & sellers to come together
Factor (resource) Market
Market where resources are bought & sold
Product Market
Market where products are bought & sold
Markets may be local, national, or global and they can even exist over the Internet
This is where entrepreneurs hire labor for wages or salaries…acquire land in return for rent
After individuals receive their income from the resources they sell in a factor market, they spend it in product markets. These are markets where producers sell their goods & services. The wages that individuals receive from businesses in the resource markets returns to businesses in the product market. Businesses use this money to produce more g&s
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20. Economic Growth
Occurs when a nation’s total output of products increases over time
Productivity
Measure of the amount of output produced with a given amount of resources
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21. Human capital
Sum of people’s skills, abilities, health, knowledge & motivation
Provides a major contribution to productivity
Government can invest in human capital by providing education & health care. Businesses can invest in training for their workers.
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22. Division of labor
Division of work into separate tasks performed by different workers
Specialization
Assignment of tasks to the workers that can perform them more efficiently
When a worker performs a task over & over, they obviously become good at it which improves productivity.
2. Division of labor makes specialization possible.
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23. Economic interdependence
We rely on each other to provide most of the products that we consume
Events in one part of the world have a dramatic impact elsewhere
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24. Economic Choices & Decision Making
Section 3
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25. Trade-Offs Alternative that is available whenever a choice is made
Decision making grid
First…There are alternatives and costs to everything we do. In a world where “there is no such thing as a free lunch,” it pays to examine these concepts closely.
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26. Opportunity Cost
Cost of the next-best alternative use of money, time, or resources when making a choice
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27. Production Possibilities Frontier (Figure 1.6 p. 21)
Diagram representing the maximum combinations of products an economy can produce when all resources are fully employed
Identify on graph
Full Employment
Cost of idle resources
Opportunity cost
Economic growth
Figure 1.6 page 21
The country will have to settle on a single-combination such as point a, b, or any other point on or inside the curve, because its reosurces are limited
Look at figures 1.7 & 1.8 to show opportunity cost & economic growth respectively
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28. Cost-Benefit Analysis
Way of thinking about a choice that compares the cost of an action to its benefits
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29. Free Enterprise Economy
Market economy in which privately owned businesses have the freedom to operate for profit with limited government intervention
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30. Standard of Living
Quality of life based on ownership of necessities and luxuries that make life easier
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