Fundamental Economic Concepts

1. Fundamental Economic Concepts The Problem – Human wants are unlimited but resources are not, therefore scarcity exists. Economics is the study of how people satisfy these unlimited wants with minimal resources. Need– basic requirement for survival Want– the manner in which the need is satisfied

2. Fundamental Economic Concepts Economic Questions That Challenge Societies – WHAT– Society must choose based on needs and goals. HOW – Society must choose based on resources. WHOM – Society must choose based on population, demographics, and available markets.

3. Fundamental Economic Concepts Factors of Production – Factors of Production are the resources necessary to produces what people need or want. They consist of the following: Land– limited natural resources Capital– means by which something is produced Labor– workers who apply efforts, skills, abilities Entrepreneursare those who take risks with their resources and produce a new product or service by combining the three factors above. The result of their actions is called Production.

4. Fundamental Economic Concepts Why Study Economics? Since economics is a social science it deals mainly with human behavior. Therefore it is necessary for us to: Describethe type of economic activities taking place. Analyzewhy and how an activity affects the economy. Explainor communicate this knowledge to a society’s population. Predictwhat might happen next based on the past and the present situation

5. Fundamental Economic Concepts Economic Products – goods and services that are useful, scarce, and transferable. Good– Economic product that is useful and satisfies an economic want. Consumer – final use by customer Capital – produces other goods and services Durable – lasts 3 years or more Nondurable – lasts less than 3 years Services – work performed by someone and is intangible. Consumers– use goods and services to satisfy wants and needs.

6. Fundamental Economic Concepts Paradox of Value – A problem exists between the idea of necessities and value. Some non-necessities have a higher value than necessities. Scarcity – not enough resources to produce all things wanted. Utility – useful and provides satisfaction. When you add A and B, the true definition of value is found and the problem is solved. Wealth– Accumulation of goods that are tangible, scarce, useful, and transferable.

7. Fundamental Economic Concepts Economic Activity in a Market Economy – Market– place where buyers and sellers exchange goods. Factor Markets– where people earn their income, and all of the factors of production come together. Product Markets- where producers sell their goods and services.

8. The Circular Flow of Economic Activity

9. Fundamental Economic Concepts Economic Growth – output of goods and services increase over time. Productivity– output increases & input remains the same. How is Productivity affected – Efficiency Division of Labor Specialization Invest in Human Capital Invest in the future Global Interdependence

10. Trade-Offs & Opportunity Cost Trade-offs are the alternative choices people face in making economic decisions. A decision-making grid 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/her final choice. When making economic decisions it is important to recognize and evaluate the costs of possible alternatives.

11. Production Possibilities The Production Possibilities Frontier Diagram illustrates the concept of opportunity cost. It shows the combinations of goods and/or services that can be produced when all productive resources are used. The line on the graph represents the full potential – the frontier – when the economy employs all of these productive resources. Identifying possible alternatives allows an economy to examine how it can best put its limited resources into production.

12. Production Possibilities Considering different ways to fully employ its resources allows an economy to analyze the combination of goods and services that leads to maximum output. An economy pays a high cost if any of its resources are idle. It cannot produce on its frontier and it will fail to reach its full production potential. Economic growth due to more resources, larger labor force, or increased productivity, causes a new frontier for the economy.

13. The Production Possibilities Frontier

14. Please take the following information and illustrate on the graph below. Be sure to form the Production Possibilities Frontier. Grain Wine

15. If the firm were to increase production of good X from 6 units to 7 units, the opportunity cost of the 7th unit of good X is 150 units of good Y 200 units of good Y 350 units of good Y 500 units of good Y

16. Basic Models Simplified theory or picture - Reduces complexity Not the most realistic because of the number of goods/services involved Based on assumptions Used to understand the past, present, or future Models can be changed based on their effectiveness

17. Cost-Benefit Analysis – Cost of an action versus the benefit received Used to analyze how effective a program/decision is Take Small, Incremental Steps – Helps economists test whether the estimated cost of the decision was correct Don’t put all your eggs in 1 basket