Download Economic Way of Thinking

Economic Way of Thinking
Scarcity
The condition that results from society
not having enough resources to
produce all the things people would
like to have.
Scarcity Qualifications
1. Limited in quantity
2. Be desirable
3. Have more than one valuable use
Everything has a cost!
Free Puppies!
No such thing as a Free Lunch!
People choose for good
reasons!
Cost and Benefits
Different Values = Different
Choices
Incentive Matters
Rent control in New York
Supply and Demand
People create economic systems
to influence choices and
incentives
Market vs Command Economies
As rules change incentives and
behavior change
People gain from voluntary
trade.
Makes them better off
No benefit = no trade
Economics is about trade!
Economic thinking is marginal
thinking.
Marginal choices involve the
effects of additions and
subtractions
The value of a good or service is
affected by people’s choices.
Value is determined by the
preferences of buyers and sellers
Economic actions create
secondary effects.
Rent controls make apartments more
affordable to some.
Less profitable to build and maintain.
(Friends)
The test of a theory is its
ability to predict correctly.
It the theory correctly predicts the
consequences of actions, it is a good
theory!
Proof is in the pudding!
So what is Economics?
Economics is the study of how
people satisfy wants with scarce
resources
Mom I NEED food!
Mom I WANT Pizza!
• NEED: basic requirement for survival
– Food, clothing, shelter
• WANT: way of expressing a need
There Is No Such Thing As
FREE Lunch!
Buy one, Get one Free
Who pays?
Decisions on how to use our limited
resources?
• WHAT to produce?
• HOW to produce?
• FOR WHOM to produce?
WHAT to produce?
• Military Equipment v. other goods (food
clothing housing)
• Should its limited resources be used for
_________?
• Cannot Please everyone….MUST make a
decision on WHAT to produce!
HOW to produce?
• Mass production
– Equipment v. workers
– Low v. high production cost
– Less expensive = available to the masses
FOR WHOM to Produce?
• Must be allocated to someone
• Not enough?
– A choice must be made
– Who will receive it?
Three questions MUST be
answered b/c of limited resources
Unlimited
Wants
Limited
Resources
Scarcity
Choices
WHAT to
produce
HOW to
produce
FOR
WHOM to
produce
Factors of Production
Land
Capital
Labor
Entrepreneurs
Land
• “Gifts of nature” (natural resources)
• Fixed or limited in supply
• Good farmland, sandy beaches, oil and
minerals
• Scarcity increases as population grows
Capital
• Tools, equipment, machinery, and factories
used in production of goods and services
(capital goods)
• Financial Capital: money used to buy
capital goods
• Computers in school: used to produce the
service of education
Labor
• People with effort, abilities, and skills
– Exclude the group called entrepreneurs
– Vary in size
– Why would the labor force vary in size?
Entrepreneurs
• Innovators responsible for change in our
economy
• Risk-taker
– Profits
– New with existing resources
• Start new businesses/ new products
• Initiative that combines resources (land,
labor, capital)
Production
• Factors of production are present =
PRODUCTION
• Creating of goods and services can take
place
– Schools:
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Capital goods?
Labor?
Land?
Entrepreneurs?
Gross Domestic Product (GDP)
• It is the most important measure of the
overall economy.
• It is the overall dollar amount of all goods
and services produced within the United
States borders in a year.
• American goods made in other countries
are NOT counted (ford plants in Mexico)
GDP
• Nissan plants in Tennessee DO count
toward GDP
• Secondhand sales do NOT count toward
GDP – Used Cars, Garage Sales, Thrift
Stores because they have already been
counted.
• Illegal activities such as drug sales, illegal
gambling do NOT count.
Scope of Economics
• Description
– GDP: dollar value of all final goods and services produced within
a countries boarders
– Need to know what the World around looks like
• Analysis
– Why are prices of some items high while others are low?
– Why things work and how things happen
• Explanation
– Communication of knowledge to others
• Prediction
– Rise and fall of Income
– Make best decision: what is, what tends to be, and what may
happen?
Basic Economic Concepts
Goods, Services, and Consumers
• Economic Products:
– Goods and services that are useful, scarce,
and transferable to others
– Cannot get enough to satisfy ones wants and
needs
– Command Price
Goods
• Item that is economically useful or satifies an
economic want
• Consumer Goods:
– Final use by individuals
• Capital Goods:
– Manufactured goods used to produce other goods
and services
• Durable Goods:
– Any good last three or more years when used on a
regular basis
Services
Work that is preformed for someone
Examples??
Intangible: cannot be touched
Consumers
Person who uses goods and
services to satisfy wants and
needs
Value, Utility, and Wealth
Value refers to a worth that can be
expressed in dollars and cents
Paradox of Value
• Contradiction between necessities and
value
• Water v. Diamonds
• Scarcity is required for value
– Is it enough?
Utility
• The capacity to be useful and provide
satisfaction
• Not fixed or measureable
• Vary from person to person
• i.e.: One person may enjoy a rock/R&B
concert, another may not
• Value = Scarce + Utility
• Water v. Diamonds
Wealth
• Accumulation of those products that are
tangible, scarce, useful, and transferable
• Nations wealth: includes natural
resources. Factories, houses, etc
• Services are not counted as wealth
(intangible)
• The Wealth of a Nation, 1776 by Adam
Smith (read page 18 profiles in
economics)
The Circular Flow of
Economics
Market
Factor Markets
Product Markets
The Circular Flow of Economics
• Markets: location or other mechanism that
allows buyers and sellers to exchange a
certain economic product
• Factor Markets: Where productive
resources are bought and sold. (sell your
labor for wages)
• Product Markets: producers sell their
goods and services to consumers ( you
use to money you made to buy products)
Productivity of Economic Growth
• Economic Growth:
– nations OUTPUT of goods and services
increases over time
– Circular flow chart:
• Means more factors of production (goods/services)
flowing in once direction
• Productivity:
– Measure of the amount of output produced by
a given amount of inputs in a time period
• The most efficient capital goods/most fertile land
Division of Labor
• Individual workers do fewer task
• Become proficient in a task v. less
proficient in hundreds of task
Specialization
• FOP can perform tasks that they can do
more efficiently than others
– Industry robots
– Regional specialization: GA =
Peaches/Peanuts
Henry Ford
• Assembly line
– Cut time necessary to make a car
– Cut the price of the car
Investing and Human Capital
• Human Capital: sum of the skills, abilities,
health, and motivation of people
– Gov’t can invest: Education and health care
– Businesses: training/programs to improve
motivation
– Individuals: invest in their education
• Invest: Human+Physical Capital leads to
an increase in production = ECONOMIC
Growth
Economic interdependence
• We rely and others and others rely on us to
provide goods and services that we consume
– Cars are built in the US but parts may be made in
another country
• Labor disputes:
– Basketball affects people who park cars, sell tickets,
serve food at the games, see apparel, etc
– Drought/hurricane/flooding in one country can effect
price of goods in another
Bib.
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Economics: Principles and Practices
Chapter 1
Gary E. Clayton, Ph.D.
McGraw, Glencoe
2005