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INTRODUCTION TO ECONOMICS INTRODUCTION TO ECONOMICS What is economics and why should we study it? Economics is the study of how individuals and societies make choices about ways to use scarce resources to fulfill their wants. Economics divisions. is broken down into two Microeconomics Deals with decision-making by small units such as individuals and firms. Macroeconomics Deals with decision-making by large units such as governments and the economy as a whole. INTRODUCTION TO ECONOMICS What are the scarce resources??? Factors of Production Land natural resources, surface land, and water. Labor human effort directed towards producing goods and services. Capital the buildings, equipment, and human skill used to produce goods and services. Entrepreneurial Ability managerial and organizational skills needed to start a firm, combined with the willingness to take risks. INTRODUCTION TO ECONOMICS We Need all have them… wants and needs Anything that is essential to survival. Want The extras or luxuries of life. INTRODUCTION TO ECONOMICS Needs Wants Food Water Shelter Clothing Pizza, cheeseburger Coke, Sweet tea 5 bedroom home Aeropostale, Old Navy INTRODUCTION TO ECONOMICS We all have 4 basic needs, how many wants do we have?? Why can’t we have everything we want? We all have 2 basic limited resources that prevent us from having everything: Time Money INTRODUCTION TO ECONOMICS Scarcity The condition of not being able to have all of the goods and services one wants. Scarcity always exist because wants will always exceed resources. INTRODUCTION TO ECONOMICS What about the temporary lack of resources? Shortage A temporary situation in which goods and services are unavailable. Hurricanes War Freezing temperatures Shortage vs. Scarcity Shortages are temporary, scarcity always exist. INTRODUCTION TO ECONOMICS Since our resources are limited and we have so many alternatives, we have to consider our costs when we make choices. Opportunity Cost The value of the best alternative forgone when an item or activity is chosen. Trade-off Sacrificing one good or service to purchase or produce another. INTRODUCTION TO ECONOMICS What are goods and services? Goods A tangible item used to satisfy human wants. Services An activity used to satisfy human wants. HOW DO COUNTRIES/FIRMS DECIDE WHAT THEY NEED TO PRODUCE? Productions possibilities frontier Graph showing the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given period of time. Classic example is Guns or butter. GUNS AND BUTTER • Either government can use resources to produce military goods or consumer goods. Government must make a trade-off. Unattainable Inefficient use of resources INTRODUCTION TO ECONOMICS What does it mean on the news when they say the economy is bad? Economy The production and distribution of goods and services in a society. INTRODUCTION TO ECONOMICS Economist Someone who researches and collects data to build models to show how the world works. Economic Model A simplified representation that helps explain and predict economic behavior in the real world.