What is Economics?

Scarcity and the Science of Economics

“We witness scarcity with each year’s “hot” new product.”

What is Economics?

Fundamental Economic ProblemScarcity: Condition where unlimited human

wants face limited resources.Effects almost every decision we make.

The study of how people try to satisfy wants with scarce resources.

Economics

Economics is about scarce resources, consumption and production. How many "economic elements" can you identify in the picture above?

Need: Required for survival.

Needs and Wants

• Want: Desired for satisfaction.

Because resources are limited, virtually everything we do has a cost.

Someone has to pay for production

“TINSTAAFL”

Why do you think scarcity is an issue with the rich as well as the poor?

“No such thing as a free lunch”

What To Produce: A society must choose based on its needs.

How To Produce: Society must choose based on its resources.

For Whom to Produce: Society must choose based on its population and other available markets.

Three Basic Questions

Land: Limited natural resources not created by humans (climate, fresh water, vegetation, minerals, animals)

Capital: Means by which something is produced (money, tools, equipment, machinery, and factories).

Factors of Production

Labor: Workers who apply their efforts, abilities, and skills to production.

Entrepreneur: Risk-takers who combine the land, labor, and capital into new products.

Factors of Production, continued

When all the factors of production are present, PRODUCTION, or the process of creating goods and services, takes place.

Production

Describes economic activity- Gross Domestic Product (GDP), unemployment rate, government spending, tax rates…

Analyzes economic activity and answers the “why’s” and “how’s”-why prices go up and down, or how do taxes affect savings.

The Scope of Economics

Economists offer an explanation of the economy and its activities to the society’s population.

Prediction: We want to know what’s around the corner to better prepare ourselves for the unknown.Will prices rise or fall?Will income increase or decrease?

Economics is a social science because it looks at the decisions people make and how they react to those decisions.

The Scope of Economics, continued

Basic Economic Concepts

“20% of the world’s people who live in the wealthiest nations consume 86% of the world’s goods and services. The 20% who live in the

poorest nations consume only 1.3%”

Section 2

Goods: Item that is economically useful or satisfies an economic want.

Consumer good: Intended for final use by individuals

Capital goods: Manufactured goods which are used to produce other goods and services. Ex.?

Durable goods: Any product that lasts longer than 3 years when used on a regular basis. Ex?

Nondurable goods: Any product that lasts less than 3 years when used on a regular basis. Ex?

Goods, Services, Consumers

Services: Work that is performed for someone and intangible.

Consumers: A Person who uses goods and services to satisfy wants and needs.

Why do you think the U.S. has been described as a “society of consumption”?

Goods, Services, Consumers

Value: A worth that can be expressed in dollars and cents.

Scarcity by itself is not enough to create value. For something to have value, it must also have utility.

Value, Utility, and Wealth

Utility: Provide satisfaction, which varies with the needs and wants of each person.

Utility

The accumulation of goods that are tangible, scarce, useful, and transferable from one person to another.

A nation’s wealth is comprised of all items, including natural resources, factories, etc.

Does not include services!!

Wealth

Adam Smith’s 1776 book, The Wealth of Nations, referred specifically to the ability and skills of a nation’s people as a source of its wealth.

Advocated a free market economy as more productive and more beneficial to society. Comments? Criticisms?

Wealth, continued

The Circular Flow of Economic Activity

Wealth that is generated by the economy is made possible by a

circular flow of economic activity.

The MarketFactor MarketsIndividual’s earned

incomeFocus on the four

factors of production: land, labor, capital, entrepreneurship

Product MarketsIndividual’s spending

placeFocus on goods and

services

Circular Flow Chart

ProductivityMeasure of the

amount of output produced by a given amount of input within a certain time

Productivity increases with efficient use of scarce resources.

Specialization and Division of Labor

May improve productivity because they lead to more proficiency (and greater economic interdependence)

Economic Growth: Depends on high productivity

An economy’s productivity may be affected by…

Economic InterdependenceWe rely on others, and others rely on us,

to provide the goods and services that we consume.

Section 3: Economic Choices and Decision

Making“Catch a man a fish, and you can sell

it to him. Teach a man to fish, and you ruin a wonderful business

opportunity.”

Trade-OffsAlternative Choices when making economic

decisionsDecision-making grid lists the adv./disadv

of each choice.  Criteria: How to spend my $50 gift card?!?  

Alternatives Cost $50 Durable? Will parents Future expense Can use

  or less?   approve? unnecessary? anytime?

Several CDs yes yes yes yes no

Concert Tix no no no no no

MP-3 player yes yes yes no no

Hackey sack yes yes no yes no

Jeans yes yes yes yes yes

Opportunity CostThe cost of the next best alternative among a

person’s choices.The cost may be the money, time or

resources a person gives up, or sacrifices, to make his/her final choice.

Discussion Question:What are some important economic decisions

you will be facing within the next 5 weeks? 5 months? One year? Five years?

Production Possibilities FrontierDiagram illustrating the concept of

opportunity cost.It shows the various combinations of goods

and/or services an economy can produce when all productive resources are fully employed.

Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production.

Considering different ways to fully employ its resources allows an economy to analyze the combination of goods/services that lead to maximum output.

Horizontal Line (X-axis): 100 % annual Butter ProductionVertical Line (Y-axis): 100% annual Gun Production50 units of butter

will only cost 30 units of guns

120 units of guns will cost 50 units of butter

Between pts A & B exists a near equal trade-off, which means a competition for resources

Production Possibilities continuedOpportunity Costs: Expressed in terms of

trade-offs, or in terms of things given up to get something else

The Cost of idle resources: If some resources are not employed, it is difficult for any company, nation, or individual to reach its true potential

Economic Growth: Any increase in resources and/or productivity causes the production possibilities frontier to move outward

Build simple models to analyze or describe actual economic situations.

Employ Cost-Benefit Analysis: Compare the cost of an action to the benefits received (Ex. ?)

Baby Steps: Make decisions by taking small, incremental steps toward the final goal

Thinking Like an Economist: Strategies that will

help us make the best choices

Studying economics will help us know how the economy works on a daily basis.

Helps us understand the Free Enterprise economy where consumers and privately owned businesses, not the government, make a majority of the economic decisions.

The Road Ahead

Helps us become better decision-makers, both in our personal and professional lives AND at the voting booth!!

Economics for Citizens

Every time a choice is made, something is given up!

Rational choice is taking the things with greater value and giving up those with lesser value

On an individual level, the choices are not so difficult…

On the societal level, the choices may not be so easy to make…

Making the Rational Choice