What is Economics?

1. What is Economics? Scarcity and the Science of Economics “We witness scarcity with each year’s “hot” new product.”

2. Fundamental Economic Problem • Scarcity: Condition where unlimited human wants face limited resources. • Effects almost every decision we make.

3. Economics • The study of how people try to satisfy wants with scarce resources. Economics is about scarce resources, consumption and production. How many "economic elements" can you identify in the picture above?

4. Needs and Wants • Need: Required for survival. • Want: Desired for satisfaction.

5. “No such thing as a free lunch” • 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?

6. Three Basic Questions • 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.

7. Factors of Production • 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).

8. Factors of Production, continued • Labor: Workers who apply their efforts, abilities, and skills to production. • Entrepreneur: Risk-takers who combine the land, labor, and capital into new products.

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

10. The Scope of Economics • 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.

11. The Scope of Economics, continued • 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.

12. Section 2 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%”

13. Goods, Services, Consumers • 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?

14. 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”?

15. Value, Utility, and Wealth • 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.

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

17. Wealth • 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!!

18. Wealth, continued • 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?

19. The Circular Flow of Economic Activity Wealth that is generated by the economy is made possible by a circular flow of economic activity.

20. Factor Markets Individual’s earned income Focus on the four factors of production: land, labor, capital, entrepreneurship Product Markets Individual’s spending place Focus on goods and services The Market

21. Circular Flow Chart

22. Productivity Measure of the amount of output produced by a given amount of input within a certain time Productivity increases with efficient use of scarce resources.

23. Specialization and Division of Labor May improve productivity because they lead to more proficiency (and greater economic interdependence)

24. Economic Growth: Depends on high productivity An economy’s productivity may be affected by…

25. Economic Interdependence • We rely on others, and others rely on us, to provide the goods and services that we consume.

26. 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.”

27. Trade-Offs • Alternative Choices when making economic decisions • Decision-making grid lists the adv./disadv of each choice.

28. Opportunity Cost • The 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?

29. Production Possibilities Frontier • Diagram 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.

30. Horizontal Line (X-axis): 100 % annual Butter ProductionVertical Line (Y-axis): 100% annual Gun Production • 50 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

31. Production Possibilities continued • Opportunity 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

32. Thinking Like an Economist:Strategies that will help us make the best choices • 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

33. The Road Ahead • 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.

34. Economics for Citizens • Helps us become better decision-makers, both in our personal and professional lives AND at the voting booth!!

35. Making the Rational Choice • 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…