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What is Economics? Scarcity and the Science of Economics It is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources. 3 The condition that results from society not having enough resources to produce all of the things people would like to have. 4 There Is No Such Thing As A Free Lunch 5 What to produce? How to produce? For whom to produce? 6 • Land: The “gifts of nature”. • Capital: The tools, machinery, and factories used in the production of goods and services. (Financial capital is the money used to buy these resources) • Labor: People, with all of their efforts, abilities, and skills. • Entrepreneurs: Risk takers in search of profits who do something new with existing resources. • Production: The process of creating goods and services. (Land + Capital + Labor + Entrepreneurs) 7 Economics is a social science. There are four key elements to the study of this science: Description Analysis Explanation Prediction 8 Economics deals with the description of economic activity. Description is important because we need to know what the world around us looks like. Gross Domestic Product, or GDP, is the dollar value of all final goods and services, and structures produced within a country’s borders in a twelve month period. 9 Analysis has helps us to discover why things work and how things happen. Why are the prices of some things high why some things are low? Why do some people earn higher incomes than other people? How do taxes affect people’s desire to work and save? 10 • It’s necessary for economists to be able to explain economic activity. • After economists understand why and how things work, it is useful and even necessary to communicate this knowledge to others. • If we all have a common understanding of the way our economy works, some economic problems will be much easier to address or even fix in the future. 11 • Economics deals with the study of what is, or what tends to be. Therefore, it can help predict what may happen in the future, as well as the likely consequences of different courses of action. – Will my income rise or fall in the future, and how will that affect my spending habits? – What will the consequences be for a community be that is trying to decide between higher taxes on homeowners or higher taxes on businesses? 12 Basic Economic Concepts • Economic products: Goods and services that are useful, relatively scarce, and transferable to others. • Good: An item that is economically useful or satisfies an economic want. – Consumer Good: A good that is intended for final use by individuals. – Capital Good: manufactured goods that are used to produce other goods and services. – Durable Goods: Any good that lasts for three or more years when used on a regular basis. – Nondurable Goods: Any good that doesn’t last for three years when used on a regular basis. 14 • Services: Work that is performed for someone. • Consumers: A person who uses goods and services to satisfy wants and needs. Consumers indulge in consumption in order to satisfy their wants and needs. 15 • Value: In economics, it refers to a worth that can be expressed in dollars and cents. • Utility: The capacity to be useful and provide satisfaction. It may vary from one person to the next. • Wealth: An accumulation of those products that are tangible, scarce, useful, and transferable from one person to another. 16 Paradox of value: A situation that shows that scarcity by itself is not enough to create value. Ex: Diamonds vs. Water vs. 17 Market: A location or other mechanism that allows buyers and sellers to exchange a certain economic product. They may be local, regional, national, or global. Factor Markets: the markets where productive resources are bought and sold. Product Markets: Markets where producers sell their goods and services to consumers. 18 • Economic Growth: This occurs when a nation’s total output of goods and services increases over time. • Productivity: A measure of the amount of output produced by a given amount of inputs in a specific amount of time. 19 • Division of Labor and Specialization – Division of labor: Takes place when work is arranged so that workers do fewer tasks than before. – Specialization: Takes place when factors of production perform tasks that they can do relatively more efficiently than others. 20 • Investing in Human Capital: Human capital is sum of the skills, abilities, health, and motivation of people. • Investing in the Future: When governments, businesses, and other organizations invest in human and physical capital, they can increase production and promote economic growth. • Economic Interdependence: When an entity depends, and is depended upon by, other economies. 21 Economic Choices and Decision Making Everyone faces trade-offs when they make a decision Every decision someone makes is based on their own set of criteria If you are given a gift of $100, how do you decide how to spend it? Clothes? Food? Concert tickets? 23 Opportunity Cost is how economists value decision making. It is the cost of the next best alternative use of money, time, or resources. Studying vs. Partying Working vs. Spare Time Clothes vs. Concert Tickets When you make this decision, you are using cost-benefit analysis. 24 • This is a diagram representing various combinations of goods and/or services that can be produced when all resources are utilized. • Companies are able to make this decision on their own because we are in what is called a free-enterprise economy. This is when consumers and private businesses get to decide WHAT, HOW, and FOR WHOM they will produce things. 25 26