Download Chapter 1 Notes Sheet Economics Chapter 1.1 What is Economics

Chapter 1 Notes Sheet
Economics
Chapter 1.1
What is Economics?
The Fundamental Economics Problem

The fight between wanting nicer things and accepting what we have

The fundamental economic problem facing all societies is that of _____________.
o Scarcity – condition that results from society not having enough resources to produce all the
things people want
Economics
 Scarcity fits in with Economics because:
o Economics -
Needs vs. Wants
 Need -

Want –
If Scarcity Exists
 Why can I get a free Hot Dog with the purchase of one?

Hidden costs to subsidize the “free”
Three Basic Questions
 Since resources are scarce (and not free) we must use them to the best of their abilities there is
fundamental questions that must be asked
o
o
o
What to Produce
 Start off with looking at what resources there are to work with.
 Then look at what will benefit society the most
o
o
o

We will also need to know how many _________ will be needed

It is impossible to create/have everything that people want so ___________ to produce is important.
How to Produce
 Once we know what is being produced it comes down to what methods will be used.

Should a ________________________ of people be used or should investments be made to use
expensive equipment?

Providing jobs vs. ______________________ costs and making it available.
FOR WHOM to Produce
 Once it’s known what is to be made and how its going to be created, the ________________________
has to be selected?
o Will the houses that are being built go to low in come families or subsidized for government
workers?
o Do we want to create high-end tech products for grandparents?
The Factors of Production
 People cannot have everything they want or need unless it is provided. Some are provided naturally but
most need to be produced.

The Factors of Production – resources required to produce the things we would like to have are:
o
o
o
o
Land
 Land 
“Land” includes all types of :
o
o
o
o

Natural resources are limited

Economists claim Land is fixed meaning as population grows there will not be enough for everyone

Not enough farming for the world, not enough natural resources for all the cars, etc.
Capital
 Capital 
Often these items are referred to as ________________________ to distinguish them from financial
capital
o The money used to buy the tools and equipment used in production.
o i.e. computers, cash registers, building tools...
Labor
 Labor –

This refers to pretty much everyone minus _____________________.

Labor can be affected by the various influences:
o
Entrepreneurs
 Definition –

An Entrepreneur is a __________________ in search of profits who does something new with existing
resources.

They are often thought to be the driving force of the economy.

They combine ___________, ______________, and _______________ into a business.
Production
 When all the factors come together production takes place.

Production –

Everything we produce requires all the factors of production.

School? – Land, Capital, Labor, Entrepreneurs...
The Scope of Economics
 With knowing what goes into production we need to figure how it goes into Economics.
 Since it’s the study of people’s efforts to satisfy their wants with available resources we need to look at
the people.
 There are 4 key elements that we must look at:
o
o
o
o
Description
 Often economies are described by their GDP (__________________________________)
o The dollar value of all final goods and services and structures produced by a country in a 12
month period

Description is important because we need to know what the world around us looks like.

No why or how
Analysis
 To get the Why and the How answered, economists must __________________ __________
_______________.

This helps to answer problems like
o “Why are some taxes higher than others?”
o “Why does x makes more than y?” etc
Explanation
 Once those questions are answered, society needs to know.

By knowing it makes it easier to attempt to fix the economic problems and better our society.

A lot of the time though, economists are explaining why the GDP didn’t turn out how we wanted.
Prediction
o By describing, analyzing, and explaining economics to society people and economists alike can make
______________________.
o When situations are presented economists can make predictions as to what the economy will do and
attempt to make the best decisions.
Basic Economic Concepts
Chapter 1.2
Good, Services, and Consumers
 Each of the above falls under the term:
 _______________________ –
goods and services that are useful, relatively scarce, and transferable to others

These products are scarce in the sense that there are not enough to satisfy individual want and needs

Thus _______________ are determined
Goods
 Good – an item that is economically useful or satisfies an economic want
o

Consumer Good – is intended for final use by individuals
o

Capital Good – manufactured goods used to produce other goods and services
o

A good that lasts more than 3 years is a _____________________ and both capital and consumer goods
fall under this term.

__________________________ are things that last less than 3 years
Services
 Service –

Services included everything from haircuts and car work to doctors, lawyers, and teachers.

Services though are intangible – cannot be touched or measured.
Consumers
 The __________________ is the person who uses goods and service to satisfy wants and needs

Consumers use goods on their own time or for their own uses and look to services for help and
entertainment.
Value, Utility, and Wealth
o Value in economic terms –
Paradox of Value
 The Paradox of Value refers to:
o

For example, the paradox is where some necessities like _____________ have little monetary value and
wants like ____________________ have much higher value...

______________________ is required for value and solves one part of the paradox.
Utility
 Utility –
o It is not fixed or measureable and is determined by each person

Utility usually does not apply to everyone just some for a certain product.

For something to have value it must be scarce and have utility.
Wealth
 ________________ (in an economic sense) – the accumulation of those products that are tangible,
scarce, useful, and transferable

A nation’s wealth is comprised of everything we create and our natural resources.

_____________________ are not counted but still important.

If resources were gone skilled people would create, if people were gone the resources would fall to
uselessness. – Adam Smith
The Circular Flow of Economic Activity
 So all the wealth and etc that is created in the economy is made possible by the circular flow of activity
in the market.

Market – a location or other mechanism that allows buyers and sellers to exchange a certain economic
product

Markets can be:
o
o
o
Factor Markets
 Individuals such as you and I earn our money in a Factor market

Factor Market –

This is where entrepreneurs hire labor, acquire land, and borrow money.

It’s a small version of the large world.
Product Market
 After individuals receive their income from the resources they sell they spend it in Product Markets.

Product Markets –

Thus the _______________ that is made in factor markets come back to businesses in the product
market.
Circular Flow of Economic Activity
Productivity and Economic Growth
 ______________________ occurs when a nation’s total output of goods and services increases over
time

The flow of economic activity then gets larger.

While a number of factors can cause this growth, it basically boils down to _______________________.
Productivity
 Productivity –

Productivity goes up when more _______________ can be produced using the same amount of
__________________.
o I made 25 pizzas on Monday during 3 hours
o I made 30 pizzas on Tuesday during the same 3 hours.

Its fits into all factors of production not just labor.
o Capital goods and land especially
Division of Labor and Specialization
 Entrepreneurs are always looking for way to increase productivity.

Division of Labor –

A worker who does the same task each day will become more proficient rather than learning 100
different tasks.
Specialization
 ___________________ – when factors of production perform tasks that they can do relatively more
efficiently than others. NOT JUST LABOR.

Capital goods such as assembly are specialization. As is regional specializatio
Combine Division of Labor and Specialization for Productivity
 Henry Ford’s assembly line
o Cut the necessary time of putting together a car from a day and half to _________ minutes.
o This cut the price of the car down by _________%

American Agriculture
o 1910 – ____________ million farmers to feed America
o 2000s – ___________ million farmers can feed America, which is 3x larger today.
Investing in Human Capital
 One of the main contributions to productivity comes from investments in human capital

Human Capital – the sum of the skills, abilities, health, and motivation of people

Investment in human capital comes from all over
o
o
o
Economically Interdependent
 While we invest in ourselves and try to increase our own economy, we find that we are _____________
_______________________
o This means that we rely on others and others rely on us to provide goods and services we
consume
Choices and Decision Making
Chapter 1.3
Decision Making
 Obviously the art of making a choice is not always easy
o Doing your homework or watching T.V.
 Identify the problem and analyze the alternatives
o Complete homework and not watch T.V.
o Get a better grade in class
Trade-offs and Opportunity Costs
 There are alternatives to everything we do.
o You could do one thing or another
o Some are easy to decide (chocolate or vanilla)
o Others are difficult (Careers)
Trade-Offs
 Each day we face trade-offs
o Trade offs –

To assist in making a decision we, as economists, can make ________________ and ______________
to make the data easier to consume.
Opportunity Costs
 Is cost only measured in dollars and cents?

It's measured in more than just the price tag.

Opportunity Costs –

Suppose you have $5,000 and you buy a used car:
o You could have paid rent on an apartment
o Gone on a European vacation
Production Possibilities
 Another model that is often used to consider and illustrate is:
 ________________________________________:
o A diagram representing various combination of goods and/or services an economy can produce
when all productive resources are fully employed
Build Simple Models
 The economic model is the bread and butter for economists
o Model –


The Economic Flow Chart
The Production Possibility Frontier
Simple Models
*WARNING*
 Remember:

We cannot be sure that they are true
o We assume that the new 5 star restaurant in town is above our price range.
o However the actual price range is between $6-7.
o Our models are no better than the assumptions they are based on.
Employ Cost-Benefit Analysis
 Another way economists come up with solutions is cost-benefit analysis:
o Cost-benefit analysis –


Jesse’s Chart
Example:
o You like A and B equally.
o B costs less, so it would have more utility per $ spent.
Take Small, Incremental Steps
 Last basic option is to take small and incremental steps towards the solution


Very valuable when we don’t know what the outcome will be
o If the cost outweighs the return we can stop before we are too hurt
There are few all or nothing decisions
Next?
 Economics is more than just scarcity:
o It’s also how things are made, bought, sold, and used
o Peoples uses and why
 Free Enterprise System -