Economics: Principles and Practices

1. Economics: Principles and Practices Chapter One

2. The Toy Problem • We witness scarcity with each year’s “hot” new toy • Teddy bear in 1906, • Cabbage patch kids in 1980’s • Tickle Me Elmo in 1996 • Pokemon game boy’s in 1999 • Can you think of more recent scarce toys?

3. The Fundamental Economic Problem • Scarcity is the condition where unlimited human wants face limited resources. • Economics is the study of how people satisfy wants with scarce resources. • Needs are required for survival; wants are desired for satisfaction. • Someone has to pay for production costs; so there is no such thing as a free lunch. • Why is scarcity an issue for both rich and poor?

4. Three Basic Economic Questions • What should we produce? Society must choose based on its needs • How should we produce it? Society must choose based on its resources. • For whom should we produce? Society must choose based on its population and other available markets. ? How might the economic decisions of a mountainous island differ from those of a mountainous landlocked society?

5. The Factors of Production • These factors are the resources necessary to produce what people want and need. • Land, minerals, vegetation, animal life and climate are society’s limited natural resources. • Capital = means to production ($, tools, equipment, machinery, etc.) • Entrepreneurs = risk takers, combine land, labor, & capital into new products • Production = creating goods/services from land, capital, labor and entrepreneurs

6. Why are entrepreneurs an economy’s driving force?

7. The Scope of Economics • Economics deals with the description of economic activity = gross domestic product, unemployment, govt. spending, tax rates, etc. • Looks at how and why of econ activity (ex: why prices go up, how taxes affect savings) • Explanation = how economists communicate knowledge to society • Prediction = how yesterday’s and today’s economic activities advise us of potential future activity.

8. What makes economics a social science?

9. Did You Know? • The 20 percent of the world’s people live in the wealthiest nations consume 86 percent of the world’s goods and services. • The 20 percent who live in the poorest nations consume just 1.3 percent.

10. Goods, Services, Consumers • Goods = useful and satisfy an economic want, tangible, classified as either consumer/capital and durable/nondurable. • Services = work performed by someone, nontangible. • Consumers use goods and services to satisfy wants and needs. • Why is the U.S. called a “society of consumption”?

11. Value, Utility, and Wealth • Value is worth expressed in dollars and cents. Scarcity alone does not create value, it must also have utility. • Utility is a good’s or service’s capacity to provide satisfaction, which varies with the needs and wants of each person. • Wealth is the accumulation of goods that are tangible, scarce, useful, and transferable to another person. Wealth does not include services.

12. Why might a wealthy society not have as much economic staying power as another wealthy society with a highly skilled labor force?

13. The Circular Flow of Economic Activity • Markets are locations/mechanisms for buyers and sellers to trade. They are classified as local, regional, national, global, and cyberspace. (pg. 26 textbook) • A factor market is where people earn their incomes. They focus on 4 factors of production: land, capital, labor, and entrepreneurs. • A product market is where people use their income to buy from producers. Product markets center on goods and services. • Are landlords a part of a factor market?

14. Productivity & Econ. Growth • Productivity is a measure of the amount of output produced by the amount of inputs 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) • Investing in human capital improves productivity because when people’s skills, abilities, health, and motivation advance, productivity increases. • Economic growth depends on high productivity. Yet, an economy’s productivity may be affected by its interdependence – reliance on others and their reliance on us to provide goods and services.

15. How may economic interdependence be a strength of an economy? A weakness?

16. Trade offs and Opportunity Costs • Trade-offs are the alternative choices people face in making an economic decision. A decision–making grid (pg. 15 textbook) lists the advantages and disadvantages of each choice. • Opportunity cost is the cost of the next best alternative among a person’s choices. The opportunity cost is the money, time, or resources a person gives up, or sacrifices, to make his final choice. • Why do you think economists believe opportunity cost is an important factor to consider in additional to monetary cost?

17. Production Possibilities • Production possibilities frontier diagram illustrates opportunity cost – the combination of goods and/or services that can be produced when all productive resources are used. The line on the graph (pg. 16 textbook) represents full potential when the economy employs all productive resources. • Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production. This can in turn lead to maximum output. • Economic growth made possible by more resources, a larger labor force, or increased productivity causes a new frontier for the economy.

18. Thinking Like an Economist • Building simple models help economists analyze or describe actual economic situations. • Cost-benefit analysis helps economists evaluate alternatives by looking at each choice’s cost and benefit. • Taking small, incremental steps in implementing an economic decision helps economists test whether the estimated cost of the decision was correct. • How might economic growth stimulate greater production possibilities?

19. The Road Ahead • Studying economics will help us know how the economy works on a daily basis. • It helps us understand a free enterprise economy, where people and privately owned businesses rather than the govt. make the majority of the economic decisions. • The study of economics helps us to become better decision makers. • The world of economics is complex and dynamic, as is our society. • What single economic goal have you set for yourself as a result of your study of economics?

20. Chap. Two Traditional Economies • In traditional economy, roles and economic decisions are defined by custom. Ex: central African Mbuti, Australian Aborigines, and northern Canada’s Inuits. • Advantages: everyone knows which role to play, little uncertainty about WHAT, HOW and for WHOM to produce. • Disadvantages: discourages new ideas and new ways of thinking, lower standard of living than in other societies. • How would your life be different if you had grown up in a traditional economy?