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What is Economics?

What is Economics?. Chapter 1 Notes. Economics. Economics is a social science that studies how people, acting individually or in groups, decide how to use scarce resources to satisfy their wants . Economist Alfred Marshall stated that economics is about the “ordinary business of life.”

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What is Economics?

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  1. What is Economics? Chapter 1 Notes

  2. Economics • Economics is a social science that studies how people, acting individually or in groups, decide how to use scarce resources to satisfy their wants. • Economist Alfred Marshall stated that economics is about the “ordinary business of life.” • Ordinary business is about how people choose to satisfy their wants.

  3. Scarcity & Opportunity Cost • “People are never satisfied.” • Scarcity means that an inequality exists between wants & the resources available to satisfy them • Scarcity is the fundamental problem in economics • Scarcity = wants > available resources • Scarce resources have not always been scarce (i. e. oil)

  4. Human Wants • Physical vs. psychological wants • Food, clothing, water and shelter are necessary to maintain a healthy, safe life • Physical wants change as we mature • Psychological wants are not necessary to existence but make us feel better & even happier

  5. The Want-Satisfaction Chain • Trying to satisfy people’s wants is a complex process • In an economy, millions of people work in thousands of businesses to produce & distribute goods & services to satisfy people’s wants. • Turn to Figure 1-1 on page 3

  6. The Want-Satisfaction Chain • Human want • Resources to produce the want • Production of good or service • Finished good or service (or product) • Distribution • Consumption • Want-satisfaction is the result • Want-satisfaction begins all over again

  7. 4 Types of Productive Resources 1. Natural resources - unaltered gifts of nature (soil, minerals, timber, water, etc) 2. Human resources (or labor) – the physical & mental efforts people use to create goods & services 3. Capital resources – buildings, tools, machines people create & use to produce final goods & services 4. Entrepreneurship – is the imagination, innovative thinking & management skill needed to start & operate a business Entrepreneurs are willing to take risks in the hope of making a profit

  8. 4 Types of Productive Resources Resources are important to the success of a business & to the U. S. economy

  9. Opportunity Cost • Scarcity forces us to think about our alternatives • Opportunity cost is the highest valued alternative given up as a result of making a choice

  10. The Economic Way of Thinking • John Maynard Keynes said economics “…is a method…an apparatus of the mind, a technique of thinking.” Key Ideas: • Scarcity forces people to choose • All Choices Involve Alternatives • People try to make good choices

  11. The Economic Way of Thinking 4. People respond to incentives 5. People gain when they trade voluntarily 6. Choices are future-oriented 7. Our choices are influenced by the choices of others 8. Applying the economic way of thinking

  12. Thinking at the Margin • Marginalsimply means the extra benefit or additional costs or benefits of a decision • Every choice involves benefits and costs • As long as a decision has more benefit than the costs, it is worth it to continue

  13. Choice-making by Businesses • The profit motive is an incentive for a business • The business must sell enough of its product to exceed costs • Profit = Total Sales > Total Costs • Business people think at the margin (As long as the benefit or profit exceeds the costs, they will continue to produce)

  14. Market Economy • Market Economy – an economy that relies on voluntary trade as the primary means of organizing & coordinating production • Amarket is an arrangement that allows buyers & sellers to trade with one another

  15. Basic Economic Decisions in a Market Economy • What are the 3 Basic Economic Decisions of Economic Systems? 1. What goods & services to produce? 2. How should goods & services be produced? 3. For whom will goods & services be produced?

  16. Two Branches of Economics • Macroeconomics is the study of the economy as a whole 1. Examines the “big picture.” 2. Unemployment, production level of a country, inflation, poverty, long-term economic growth

  17. Two Branches of Economics • Microeconomics is the study of individual consumers & businesses 1. Examines the choices that individuals, families & businesses make 2. How much to charge for an event, Employee wages, advertising campaign, etc.,

  18. Goods & Services • Goods – physical products businesses produce • Services – “can’t touch these”; performed for someone else

  19. Utility • Utility refers to the usefulness or satisfaction of something • People have different utilities for different items and it effects how much they are willing to pay for goods & services

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