The Fundamental Problem of Economics

1. The Fundamental Problem of Economics • Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have. • Economics is the study of how people try to satisfy unlimited wants and needs using scarce resources. • By the definition of the word economics, the main problem has to be scarcity because we have limited resources and unlimited wants and needs.

2. Wants and Needs • A need is a basic requirement for survival and includes food, clothing, and shelter. • A want is a way of expressing a need • Food is a need, to satisfy the need a person may want pizza. • There Is No Such Thing As A Free Lunch – means that because resources are limited, virtually everything we do has a cost – even when it seems as if we are getting something “for free.”

3. Three Basic Questions • WHAT to produce • HOW to produce • FOR WHOM to produce

4. The Factors of Production • There are four factors of production • Land – refers to natural resources, not created by humans. • Capital – the tools, equipment, machinery, and factories used in the production of goods and services. • financial capital – the money used to buy the tools and equipment used in production • Labor – the people with all of their efforts, abilities, and skills. • Entrepreneur – a risk-taker, in search of profits who does something new with existing resources. • Production is the process of creating goods. All factors must be present for production to take place.

5. The Scope of Economics • There are four key elements of the study of economics. • Description – important because we need to know what the world around us looks like to make good decisions. • Analysis – important to help us discover why things work and how things happen. • Explanation – we must be able to communicate our findings to others. • Prediction – the ability to forecast trends aids decision making.

6. Basic Economic Concepts • Economic products are scarce in an economic sense. That is, one cannot get enough to satisfy individual wants and needs. • Goods • A consumer good is intended for final use by individuals. • A capital good is a manufactured good is used to produce other goods. • Services • a service is work that is performed for someone. • examples include haircuts, home repairs, and forms of entertainment such as concerts. • Consumers • a consumer is a person who uses goods and services to satisfy wants and needs.

7. Value, Utility and Wealth • Value • refers to a worth that can be expressed in dollars and cents. • paradox of value refers to the situation where some necessities, such as water, have little value, whereas some non-necessities, such as diamonds, have a much higher value. • in order for something to have value, it must be scarce and have utility, or the capacity to be useful. • wealth, in an economic sense, is the accumulation of those products that are tangible, scarce, useful, and transferable from person to person.

8. The Circular Flow of the Economy • The wealth that an economy generates is made possible by the circular flow of the economy. • a key feature of this circular flow is the market, a location or other mechanism that allows buyers and sellers to exchange a certain economic product. • factor markets – markets where productive resources are bought and sold. • product markets – markets where producers sell their goods and services to customers.

9. Productivity and Economic Growth • Economic growth occurs when a nation’s total output of goods and services increases over time. • The most important factor for economic growth is productivity. • a measure of the amount of output produced by a given amount of inputs in a specific period of time. • business owners try to increase productivity through efficiency. • Division of labor and specialization help to increase efficiency in the workplace.

10. Human Capital • One of the main contributions to productivity comes from investments in human capital. • The sum of the skills, abilities, health, and motivation of the people. • Government can invest in human capital by helping to provide education and health care. • Businesses can invest in training and other programs that improve skill and motivation of workers. • Individuals can invest in their own education by completing high school, going to technical school, or going to college.

11. Economic Choices and Decision Making Trade-offs – are alternative choices you can make when making an economic decision. Opportunity cost – is the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. Everything has a cost. REMEMBER, cost isn’t always money.

12. Production Possibilities • A production possibilities frontier is a diagram representing various combinations of goods and/or services an economy can produce when all resources are fully employed. • Growth on a PPF curve is shown by points lying outside of the curve. • Factors contributing to growth can be population growth, an increase in capital stock, or through a productivity increase.

13. Thinking Like an Economist • Most economic decisions can be made by using a cost-benefit analysis. • a way of thinking about a problem that compares the costs of an action to the benefits received. • The study of economics is important to the American free enterprise system because it will provide a working knowledge of property rights, competition, supply and demand, the price system, and the economic incentives that make the American economy function. • The American standard of living, the quality of life based on the possession of the necessities and luxuries that make life easier, is effected by the roles of business, labor, and government in the American economy.