Economics

1. Economics • The Social Science that deals with the fundamental economic problem of meeting people’s virtually unlimited wants with scarce resources • Needs are basic requirements for survival – food, clothing, and shelter • Wants are something we would like to have but is not necessary for survival • We all have needs and unlimited wants and we all have limited resources, even Bill Gates – even he cannot buy certain things like time!

2. Unlimited Wants • The human characteristic of never having all wants satisfied. • The “Pig Principle” – generally speaking, people prefer n+1 of a good to n.

3. Limited Resources • The condition of there not being enough resources to fulfill all wants and needs • If you won a million dollars could you satisfy all your wants and needs? • How about 100 million? • Typically more $ creates more wants and needs!

4. Scarcity • The fundamental economic problem of meeting people’s virtually unlimited wants with scarce resources • In other words… Unlimited wants and needs + limited resources = Scarcity • Scarcity is always the economic problem

5. Allocation • The process of choosing which needs will be satisfied and how much of our resources we will use to satisfy them • Allocation is how individuals and society overcome scarcity

6. 3 Basic Economic Questions • WHAT will be produced with the limited resources? • HOW will the goods and services be produced? • FOR WHOM will the goods and services be produced?

7. The Four Factors of Production • Anything used to produce a good or service • Land – natural resources or other “gifts of nature” not created by human effort – RENT • Capital – tools, equipment, and factories used in the production of goods and services – INTEREST • Labor – people with all their efforts, abilities and skills– WAGES • Entrepreneurship – the managerial ability and risk taking that contribute so much to a productive economy - PROFIT

8. The Scope of Economics • Description – economics can describe economic activity ie. Gross Domestic Product • Analysis – economics can be used to analyze economic activity ie. Why do some prices rise faster than others? • Explanation – after analyzing a problem, economists need to communicate this knowledge with others • Prediction – economists predict what will happen in the future

9. Goods, Services, and Consumers • Good – tangible economic product that is useful, relatively scarce, and transferable • Consumer Good – good intended for final use by consumers rather than businesses • Durable Good – lasts for at least three years when used regularly • Nondurable Good – wears out or lasts for fewer than three years when used regularly • Service – work or labor performed for someone

10. Value, Utility and Wealth • Value – the monetary worth of a good or service as determined by the market • Paradox of Value – apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item • Utility – ability or capacity of a good or service to be useful and give satisfaction to someone • Wealth – sum of tangible economic goods that are scarce, useful, and transferable from one person to another

11. Circular Flow Diagram of the Economy Factor Market Product Market

12. Productivity and Economic Growth • Economic Growth occurs when a nation’s total output of goods and services increases over time • Productivity – a measure of the amount of goods and services produced with a given amount of resources in a specific period of time. Three ways to increase productivity are: • Investing in Human Capital – the sum of people’s skills, abilities, health, knowledge, and motivation

13. Productivity and Economic Growth • Division of Labor – is a way of organizing work so that each individual worker completes a separate part of the work • Specialization – takes place when factors of production perform only tasks they can do better or more efficiently than others • Our economy has a high level of Economic Interdependence – we rely on others, and others rely on us, to provide most of the goods and services we consume – events in one part of the world affects us greatly

14. Adam Smith 1723 - 1790 • He published An Inquiry Into the Nature and Causes of the Wealth of Nations • “Wealth of Nations" established economics as an autonomous subject and launched the economic doctrine of free enterprise, he • also introduced • the concept of • division of • labor and • specialization • The “Invisible Hand” – guides the most efficient use of resources in a nation's economy, with public welfare coming as a by-product • He believed in laissez- • faire economics, i.e.. the gov't should leave the economy • alone

15. Costs and Benefits • In life, every decision has an opportunity cost AND an opportunity benefit. • Opportunity Cost – the value of the next best alternative that you must give up when you make a choice • Trade-off – alternative that is available whenever a choice is to be made

16. Costs and Benefits • Ex. • You can choose to work after school or be in volleyball • You can buy a car or save for college • You can go out with your friends or on a date • You can visit your grandparents or work • You can watch TV or do your homework • You can buy a pair of shoes or an Ipod

17. PACED Decision-Making Model • Problem– define the problem • Alternatives– list the alternatives from which you must choose • Criteria– list the criteria by which you must evaluate the alternatives • Evaluate – evaluate the alternative based on the criteria you have chosen • Decide – choose the alternative that best meets the criteria you have chosen

18. Production Possibilities • Production Possibilities Frontier (Curve) – diagram representing the maximum combination of goods and/or services an economy can produce when all productive resources are fully employed Points A and B represent fully employed resources. Point C represents idle resources and Point D is unattainable for now.

19. Economic Terms • Economic Model – a simplified equation, graph, or figure showing how something works • Cost – Benefit Analysis – a way of thinking about a choice that compares the cost of an action to its benefits • Free Enterprise System – market economy in which privately owned businesses have the freedom to operate for a profit with limited government intervention • Standard of Living – quality of life based on ownership of necessities and luxuries that make life easier