What is
Economics?
The Basic Problems of
Economics
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People often use the words “need” and “want”
interchangeably.
Needs are things that are required for basic
survival.
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Food
Clothing
Shelter
Wants are anything not needed for basic
survival.
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Needs are limited. There are a finite amount of
things we need.
Wants are unlimited. We can want anything
for any reason.
Economics: the study of how individuals,
families, businesses, and societies use limited
resources to fulfill their unlimited wants.
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Spending decisions involve choices.
Each available choice competes with other
available choices.
Businesses, like individuals, must make daily
decisions about what to produce, when to
produce it, and when to stop producing.
Societies face choices about how to utilize their
resources in the production of goods and
services.
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We have to make choices because all resources are
limited.
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Trees in a large forest may appear to be unlimited but
there is a finite number of trees.
People compete for these limited resources.
Scarcity exists because people cannot satisfy their
every want.
Unlike scarcity, shortages are temporary.
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Even if everyone in the world were rich,
scarcity would continue to exist.
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There is always a limited amount of resources and
people will always compete for those resources.
Time is also subject to scarcity- no one has unlimited
time.
Scarcity: the condition of not being able to have
all of the goods and services one wants,
because wants exceed what can be made from
all available resources at any given time.
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Factors of Production: resources of land,
labor, capital, and entrepreneurship used
to produce goods and services.
Some economists have begun to list
technology as a factor of production as
well.
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Land: natural resources, surface land, and
water.
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Land also includes Fish
 Animals
 Forests
 Mineral Deposits
 Other “gifts of nature”
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Labor: human effort directed toward producing
goods and services.
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Goods: tangible objects that can satisfy people’s
wants or needs.
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Services: actions that can satisfy people’s wants or
needs.
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Capital: previously manufactured goods used
to make other goods and services
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Capital goods are all the items used to produce
capital
 For example- The machines, buildings, and tools used
to assemble and automobile would be classified as
capital goods.
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Capital is designed to increase productivity.
 Productivity: the amount of output (goods and services)
that results from a given level of inputs (land, labor,
capital, entrepreneurship).
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Entrepreneurship: ability of risk-taking
individuals to develop new products and start
new businesses in order to make profits.
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Entrepreneurs must also incur the costs of a failed
business.
 About 30% of new business enterprises fail.
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Technology: advance in knowledge leading to
new and improved goods and services and
better ways of producing them.
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Some economists list technology as a factor of
production.
Previously, technology included any use of land,
labor, and capital that produced goods and services
more efficiently.
Trade-Offs
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Individuals, families, businesses, and societies
are forced to make trade-offs every time they
use their resources in one way and not another.
Trade-off: sacrificing one good or service to
purchase or another
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Trade-offs involve opportunity cost, or the loss
of one alternative when you choose another.
Opportunity Cost: value of the next best
alternative given up for the alternative that was
chosen
Considering the opportunity cost can help
people make decisions.
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Production Possibilities Curve: graph showing
the maximum combinations of goods and
services that can be produced from a fixed
amount of resources in a given period of time
This curve can help people and businesses
determine how much of each item to produce,
thus revealing the trade-offs and opportunity
cost involved in each decision.
What Do
Economists Do?
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Economics is divided into two parts,
microeconomics and macroeconomics
Microeconomics: the branch of economic theory
that deals with behavior and decision making
by small units such as businesses and firms
Macroeconomics: the branch of economic theory
dealing with the economy as a whole and
decision making by large units such as
governments
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Economic Model: a theory or simplified
representation that helps explain and predict
economic behavior
When studying a specific part of the economy,
economists often formulate theories and gather
data.
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Models show how people behave
economically.
When using a model, assume that some factors
remain constant.
Models do not show every little part of an
economy, rather a model will show only the
basic factors needed to analyze the problem at
hand.
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Models are useful if they help us analyze the
way the real world works.
The economist can test his theory in the same
way that scientists test their hypotheses.
Testing a model allows economists to see if the
model represents reality under certain
conditions.
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Much of the work of economists involves
predicting how people will react in a particular
situation.
However, models are not always accurate due
to the inability to predict human behavior.
Economists cannot take into account all of the
factors that may influence people’s behavior.
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Economists are influenced by personal
opinions, beliefs, and the government under
which they live.
These influences lead to differing economic
theories and different schools of thought can
have an impact on laws and government
policies.
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Judgments about economic policies depend on
a person’s values.
Values: beliefs or characteristics that a person or
group considers important
The science of economics is not used to judge
whether a certain policy is good or bad, rather
economists only inform us as to likely shortterm and long-term outcomes of policies.