Understanding Economics: The Study of Scarcity and Choices, Lecture notes of Economics

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The Science of

Economics

 Microeconomics is the

branch of economics

that examines the

choices of individuals

concerning one product,

one firm, or one

industry.

 Macroeconomics is the

branch of economics

that examines the

behavior of the whole

economy at once.

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 Economics 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.

 The fundamental economic problem facing all societies is Scarcity. Scarcity is the condition that results for society not having enough resources to produce all the things people would like to have.

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 A need is a basic requirement for survival and includes food, water and shelter.

 A want is a way of expressing a need. Since a variety of wants can satisfy a need, wants tend to be broader than needs.

 There is no such thing as a

free lunch

How did this product

get to the table in

your house?

List from the farmer

to the grocer.

How many people touched this product?

http://www.youtube.com/watch?v=l-bflQuRLbU

Seemingly

Unlimited Wants

Limited Resources

SCARCITY

CHOICES

WHAT

To Produce

HOW

To Produce

FOR WHOM

To Produce

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 You are the leaders of a third world country. You have a major problem: You do not have enough resources to feed and take care of the healthcare needs of your people. You must make decisions. Who do you feed or provide healthcare for?  Food Healthcare

 1 - 10 years old 30%??

 11 – 60 years old 50%??

 61 – 85 years old 20%??

 You cannot exceed 100% You have a population of 1 million.

 What to Produce

◦ Should they produce military goods or food?

 How to Produce

◦ Should they use equipment and few people or use more people and less equipment?

 For Whom to Produce

◦ How are the things produced allocated?

All the processes involved in making wealth and bringing it from its place of origin to the ultimate consumer. Land Labor Capital Entrepreneurship (Management )

 The entire material universe exclusive of people and their products

◦ Everything physical (other than human beings)

which is not the result of human effort is within the

economic definition of land.

 This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities.  The trees in a virgin forest are land; in a cultivated forest they are wealth.

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 All human exertion in the production

of wealth

◦ All who participate in production by their mental and/or physical effort are laborers in the economic sense. This would include their efforts, abilities and skills.

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 Wealth used to produce more wealth, or

wealth in the course of exchange.

◦ A machine is wealth. If used to produce shoes or other wealth, the machine is wealth that is capital (capital good). So also would a merchant’s stock (inventory) of goods in trade be capital because the final exchange is not been completed.

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 Some economist include workers that

have a special status because they are

the innovators responsible for much of

the change in our economy.

 An entrepreneur is a risk-taker in search

of profits.

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 When all factors of production (land, labor, capital and entrepreneurship) are present, production, or the process of creating goods and services, can take place.  Note!! Everything we produce require these factors.  GDP – The total production of goods and services created within a country during a calendar year.

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 Use the pictures below. What are the factors

depicted?

 Description

◦ Describing Economic Activity

 Analysis

◦ Trying to determine “why” something happens

 Explanation

◦ Using Economic theory to explain how things work

 Prediction

◦ Using Economic events to predict future economic activity

 Basic Economic Concepts ◦ Goods – items that are economically useful or satisfies an economic want  Consumer Goods – used by individuals  Capital Good – Goods used to produce more goods ◦ Services – work that is preformed for someone ◦ Consumer(s) – a person who uses a good or service

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 Why are some necessities, such as water,

have little monetary value while some non-necessities like diamonds, have a much higher value? ◦ Economist know that scarcity is required for value.

◦ Value – worth that can be expressed in dollars ◦ Utility – the capacity to be useful and provide satisfaction ◦ Wealth – is the accumulation of products that are tangible, scarce, useful, and transferable from one person to another.

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 A market is a mechanism that allows buyers and sellers to exchange a certain economic product. ◦ Factor Markets – are where productive resources are bought and sold. ◦ Product Markets – are where producers sell their goods and services to consumers.

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Business Income

Consumer Spending

Product Markets

Factor Markets

Businesses (^) Individuals

Payments for Resources Income fromResources

Goods & Services

Buy Productive Resources

Circular Flow

Sell Land, Labor Capital Entrepreneurs

$

Supply Purchases

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◦ Economic growth occurs when a nation’s total output of goods and services increases over time. ◦ Economic productivity is a measure of the amount of output produced by a given amount of inputs during a specific period of time.

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 Human Capital is the sum of the

skills, abilities, health, and

motivation of people.

◦ Government & Businesses can invest in human capital (labor) by providing education (training) and health care to improve the skill and motivation of its workers.