Fundamental Economic Concepts
The Problem –
• Human wants are unlimited but resources are
not, therefore scarcity exists.
•Economics is the study of how people satisfy
these unlimited wants with minimal resources.
a. Need – basic requirement for survival
b. Want – the manner in which the need is
satisfied
Fundamental Economic Concepts
Economic Questions That Challenge Societies –
•WHAT – Society must choose based on needs
and goals.
•HOW – Society must choose based on resources.
•WHOM – Society must choose based on
population, demographics, and available markets.
Fundamental Economic Concepts
Factors of Production –
• Factors of Production are the resources necessary to
produces what people need or want. They consist of
the following:
1.
Land – limited natural resources
2.
Capital – means by which something is produced
3.
Labor – workers who apply efforts, skills, abilities
• Entrepreneurs are those who take risks with their
resources and produce a new product or service by
combining the three factors above. The result of their
actions is called Production.
Fundamental Economic Concepts
Why Study Economics?
• Since economics is a social science it deals mainly
with human behavior. Therefore it is necessary for us
to:
1. Describe the type of economic activities taking
place.
2. Analyze why and how an activity affects the
economy.
3. Explain or communicate this knowledge to a
society’s population.
4. Predict what might happen next based on the past
and the present situation
Fundamental Economic Concepts
I.
Economic Products – goods and services that are
useful, scarce, and transferable.
A. Good – Economic product that is useful and
satisfies an economic want.
1. Consumer – final use by customer
2. Capital – produces other goods and services
3. Durable – lasts 3 years or more
4. Nondurable – lasts less than 3 years
B. Services – work performed by someone and is
intangible.
C. Consumers – use goods and services to satisfy
wants and needs.
Fundamental Economic Concepts
II. Paradox of Value – A problem exists between
the idea of necessities and value. Some nonnecessities have a higher value than necessities.
A. Scarcity – not enough resources to produce
all things wanted.
B. Utility – useful and provides satisfaction.
C. When you add A and B, the true definition of
value is found and the problem is solved.
D. Wealth – Accumulation of goods that are
tangible, scarce, useful, and transferable.
Fundamental Economic Concepts
III. Economic Activity in a Market Economy –
A. Market – place where buyers and sellers
exchange goods.
B. Factor Markets – where people earn their
income, and all of the factors of production
come together.
C. Product Markets- where producers sell their
goods and services.
The Circular Flow of Economic Activity
Fundamental Economic Concepts
IV. Economic Growth – output of goods and
services increase over time.
A. Productivity – output increases & input
remains the same.
B. How is Productivity affected –
i. Efficiency
ii. Division of Labor
iii. Specialization
iv. Invest in Human Capital
v. Invest in the future
vi. Global Interdependence
Trade-Offs & Opportunity Cost
•Trade-offs are the alternative choices people face
in making economic decisions. A decision-making
grid lists the advantages and disadvantages of each
choice.
•Opportunity cost is the cost of the next best
alternative among a person’s choices. The
opportunity cost is the money, time, or resources a
person gives up, or sacrifices, to make his/her final
choice. When making economic decisions it is
important to recognize and evaluate the costs of
possible alternatives.
Production Possibilities
•The Production Possibilities Frontier Diagram
illustrates the concept of opportunity cost. It shows
the combinations of goods and/or services that can
be produced when all productive resources are
used. The line on the graph represents the full
potential – the frontier – when the economy
employs all of these productive resources.
•Identifying possible alternatives allows an
economy to examine how it can best put its limited
resources into production.
Production Possibilities
•Considering different ways to fully employ its
resources allows an economy to analyze the
combination of goods and services that leads to
maximum output.
•An economy pays a high cost if any of its resources
are idle. It cannot produce on its frontier and it will
fail to reach its full production potential.
•Economic growth due to more resources, larger
labor force, or increased productivity, causes a new
frontier for the economy.
The Production Possibilities Frontier
•Please take the following information and illustrate on the graph below. Be sure to form the Production Possibilities Frontier.
Wine (Thousands of bottles)
0
5
9
12
14
15
Grain (Thousands of bushels)
15
14
12
9
5
0
Grain
Wine
If the firm were to increase production of good X from 6 units to 7
units, the opportunity cost of the 7th unit of good X is
A. 150 units of good Y
B. 200 units of good Y
C. 350 units of good Y
D. 500 units of good Y
Basic Models
•Simplified theory or picture - Reduces complexity
•Not the most realistic because of the number of
goods/services involved
•Based on assumptions
•Used to understand the past, present, or future
•Models can be changed based on their
effectiveness
Cost-Benefit Analysis –
•Cost of an action versus the benefit received
•Used to analyze how effective a program/decision is
Take Small, Incremental Steps –
•Helps economists test whether the estimated cost
of the decision was correct
•Don’t put all your eggs in 1 basket