What is Economics?
McFarland
Economics
• The study of choices that people make to
satisfy their needs and wants.
NEEDS
• What is needed for survival.
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Food
Clothing
Shelter
Water
WANTS
• Beyond what is needed for survival.
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Televisions
Magazines
Phones
Radios
Economist
• A person who studies economic choices.
2 Categories of Economics
• Microeconomics –
– The study of a single factor of an economy – such as
individuals, households, businesses, and industries –
rather than an economy as a whole.
• Ex. – Exxon corp.
• Macroeconomics
– The study of an entire economy or one of its principal
sectors.
• Ex.- unemployment
• As you will see, you already understand
economic concepts, even if you think of
economics as an unfamiliar subject.
Whether you realize it or not, you take
economic action every day in the things you
chose to buy.
2 Large economic decision makers.
• Consumers –
– The people who decide to buy things.
• Producers –
– The people who make the things that satisfy
consumers’ needs and wants.
Goods
• Physical objects that can be purchased.
– Ex. – iPods, shoes, etc.
Services
• Actions or activities that are performed for a
fee.
– Ex. – lawyers, sales person, plumbers, etc.
Economic Resource
• Anything that people use to make or obtain
what they need or want.
Factors of Production
• Resources that can be used to produce
goods and services are called Factors of
Production – often divided into 4 categories.
Factors of Production
• 1.) Natural Resources –items provided by
nature found on or in the Earth.
– Ex. – oil fields in Oklahoma, trout-filled rivers
in Montana, coal mines in Kentucky.
• 2.) Human Resources – any human effort
exerted during production – can be physical
or intellectual.
– Ex. – assembly line workers, ministers
Factors of Production
• 3.) Capital Resources – the manufactured
materials used to create products – includes
capital goods (buildings, tools used in
production) and money - the finished
products that people buy are called
consumer goods.
Factors of Production
• 4.) Entrepreneurship – the organizational
abilities and risk taking involved in starting
a new business or introducing a new
product – the goal is to create something of
value – a person who attempts to start a new
business is called an entrepreneur.
• Because resources (money) are limited,
people are forced to make an economic
decision. -i.e. to choose how to spend their
money.
FACT
• All resources are limited – However,
people’s wants are unlimited.
Scarcity
• The combination of limited economic
resources and unlimited wants results in a
condition known as scarcity, which is the
most basic problem of economics.
• Limited amounts of products require people
to make decisions – people decide how to
allocate, or distribute , resources in order to
satisfy the greatest number of needs and
wants – to allocate resources effectively, an
economic system or a society must address
3 basic economic questions.
3 Basic Economic Questions
• 1.) What to produce?
– A society’s needs and wants can never be met
completely, so they must determine what is
more important.
• Ex. – new school or more busses
3 Basic Economic Questions
• 2.) How to produce?
– What method(s) will be used
• Ex. – hammer or nail gun
3 Basic Economic Questions
• 3.) For whom to produce?
– How to distribute the goods and services.
• Ex. – who will attend the new school
• After choosing what, how, and for whom, to
produce, a society must carry out these
decisions – tries to make sure that its
resources are used as effectively as possible.
Productivity
• Productivity – the level of output that
results from a given level of input.
– Ex. – Sleepy Time clock company employs 100
people to build 1000 clocks per week – in this
case the productivity is 10 clocks per employee
per week (1000/100 = 10).
Trade-off & Opportunity Cost
• One good may sometimes be sacrificed for
another – this sacrifice is called a trade-off
• The cost of this trade-off is the value of the
next best alternative given up to obtain that
item – that is called the opportunity cost.
People face trade-offs and
opportunity cost everyday.
• Ex. – Jamie has two events she would like to
attend in the same week. (concert, UK basketball
game).
• Tickets for the concert and the game cost the same
amount, but she only has enough money to buy
one ticket.
• She must make a trade-off because she can’t
afford to buy both.
• If she buys the concert ticket, the alternative
choice (game), is the opportunity cost of buying
the concert ticket.
Production Possibilities Curve
• Shows all of the possible combinations of 2 goods
or services that can be produced within a stated
time period, given 2 assumptions.
– Available resources and technology will not change
– All of the natural, human and capital resources are
being used in the most efficient manner.
Production Possibilities Curve
• KEY POINTS:
• Combinations that lie inside the curve represent an
inefficient use of existing resources.
• Combinations that lie outside the curve represent
production impossibilities.
• Each combination is measured in terms of production cost
– in other words more of one good can be produced only
by making less of the other good.
• Work Sheet
Exchange
• Process in which producers and consumers
agree to provide one type of item in return
for another.
3 Types of Exchange
• Barter – the direct exchange of goods and services without
the use of money. – ex. Turkey sandwich for a carton of
milk
• Money – any item that is accepted by people in return for
goods or services. – Ex. Bills, coins, precious metals, salt,
beads, etc.
• Credit – allows the consumers to use items before
completing payments for the item. – Ex. House and car
loans, credit cards
Value
• The worth of the good or service for
exchange purposes.
• Needs usually have a lower value than
wants.
– Ex. Diamonds cost more than water.
Value
• Value is effected by
– Scarcity
– Utility – the usefulness to a person.