What is Economics?
What is Economics?
• Definition: study of how individuals &
societies make choices about ways to use
scarce resources to fulfill their wants
Wants vs. Needs
• Wants: anything other than what is needed
for basic survival
• Needs: things required for basic survival
(Food, Clothing, Shelter)
Wants vs. Needs
• Example: In 1901, people discovered oil in Texas –
but they were actually looking for water.
Disappointed, they offered to trade the oil for water
at a ratio of 1:1 (1 barrel of oil for each barrel of
water).
Problem of Scarcity
• Scarcity is THE fundamental problem in
economics
• Maintains that all resources are limited
• People will compete for these limited
resources
• Scarcity exists because people cannot satisfy
their every want
Factors of Production
• Definition: what goes into producing a product
• 4 Factors of Production:
1. Capital: previously manufactured goods used to
make other goods & services
2. Entrepreneurship: ability of individuals to start
new businesses & develop new products; Risktaker; lemonade stand example
3. Land: natural resources & surface land & water
4. Labor: human effort directed toward production
3 Basic Questions???
1. What should be produced?
– Always a Trade off
– Ex. More $$$ on roads = less $$$ for salt in the winter
2. How should it be produced?
– Always look for Profit Maximization
– Ex. Jobs overseas, Pink slime
3. For whom should it be produced?
– In the US we use a Price System
– Can everyone afford a Ferrari?
– NOT A CHANCE! Only high-rollers like Mr. Green
Supply & Demand
• Is what determines this price system
• Demand: represents a consumer’s willingness
and ability to pay; how we define this is with...
• Law of Demand: As price goes up, quantity
demanded goes down; as price goes down,
quantity demanded goes up
Supply & Demand
• Factor effecting quantity demanded of a product:
– Real Income: people are limited by income as to what
they can buy; only a few that can afford a Ferrari
– Substitution Effect: people can replace one product
with another if it satisfies the same need
– Diminishing Marginal Utility: how one’s additional
satisfaction for a product lessens with each additional
use/purchase of it
Supply & Demand
• Supply: willingness and ability of producers to
provide goods and services
• Law of Supply: As prices increase, the quantity
supplied increases, as prices decrease, the
quantity supplied decreases
Supply & Demand
• Factors Determining Supply:
• Price of Inputs: how much it costs to produce
the product
• Number of firms in the industry: competition;
more = more supply; less = less supply
• Taxes: increase = reduction of supply (not
making as much money off product)
• Technology: increase can reduce cost of
production and increase supply
Putting Supply & Demand Together
• Equilibrium Price: point at which quantity
demanded & quantity supplied meet
• Shortage: causes prices to rise, while a
Surplus causes prices to drop…Why???
• Price Ceiling: prevents prices from going
above a specified amount; Ex. Rent in NYC
• Price Floor: prevents prices from dropping too
low; Ex. Minimum wage