The Economic Process
Objectives
1. To understand and define economic roles
of wants and needs
2. To learn different economic resources and
factors of production and distribution
3. To identify business cycles
4. To analyze the effects of supply and
demand on economic decision making
2
What is Economics
Scientific study of how governments,
households or businesses deal with
production, distribution and
consumption of goods and services
3
Two Areas of Economic Study
Macroeconomics
Microeconomics
Study of economies
as a whole; the
“Big Picture”
Study of individual
economic units,
such as
businesses and
households
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Goods and Services
• Goods – tangible items
purchased to fulfill a
desire
• Services – intangible
tasks performed in
exchange for something
of value, such as money
• Goods & services are
used to fulfill a person’s
wants or needs
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Wants versus Needs
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Economic Resources
• Use natural, human and manufactured
resources to create a good or service
• Become factors of production when being
transformed into a good or service
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Factors of Production
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Land
• Is synonymous with natural resources
• Consists of natural materials, such as:
• Used in the production process
• Includes items, such as:
–
–
–
–
mineral deposits
oil deposits
forests
water
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Land resources can be classified
into two categories
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Labor
• Is synonymous with human
resources
• Provides skills and talents to the
production process through
people
• Changes land into goods &
services
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Capital
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Management
• Is synonymous with entrepreneur or
enterpriser factor
• Initiates production
• Organizes the other three factors of
production
• Creates a profit when performed efficiently
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Three questions related to
production
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Basic Economic Problem
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How does society decide which
wants are most important?
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Opportunity Cost
• The good or service you give up when
you choose another good or service
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Opportunity Cost
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Three Important Roles Contribute
to Economic Interdependence
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Producers
• Turn economic resources into factors of
production
• Produce goods & services to sell to
distributors
• Pay wages & benefits to consumers for labor
used in production
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Distributors
• Buy goods & services from producers
• Sell goods & services to consumers
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Consumers
• Buy goods & services from distributors
• Work for producers to earn wages & benefits
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Relationship
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Cause and Effect Relationship
Between Producers, Distributors
and Consumers
If one entity decides to cut back on spending,
the other two are directly affected
Example:
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Business Cycle
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Prosperity
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Recession
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Depression
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Recovery
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Economic Decisions
Supply & demand affect the amount of goods
and services produced and purchased
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Demand
At a given time, the quantity of goods & services buyers or
consumers are willing to purchase at various prices
Price
$500
$450
$400
$350
$300
Quantity Demanded
50
100
150
200
250
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Example
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Supply
At a given time the quantity of goods & services sellers are
willing to offer at various prices
Price
$500
$450
$400
$350
$300
Quantity Supplied
250
200
150
100
50
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Example
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Supply and Demand
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Supply and Demand
Price
Quantity
Demanded
Quantity
Supplied
Surplus (+)
Shortage (-)
$500
$450
$400
$350
$300
50
100
150
200
250
250
200
150
100
50
+200
+100
0
-100
-200
Price
equilibrium
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Supply and Demand
1. If the price is $500, quantity demanded is 50 and
quantity supplied is 250; the surplus is 200
2. If the price is $450, quantity demanded is 100 and
quantity supplied is 200; the surplus is100
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3.
4.
Supply and Demand
If the price is $350, quantity demanded is 200 and
quantity supplied is 100; there is a shortage of 100
If the price is $300, quantity demanded is 250 and
quantity supplied is 50; there is a shortage of 200
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Supply and Demand
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Quiz
1. (T/F) Microeconomics is the study of the
economy as a whole.
2. What is the difference between a want and
a need?
3. List the four factors of production.
4. (T/F) Capital refers to the manufactured
instruments used to further production.
5. Which of the following is not a question
related to production?
A. what
B. how
C. when
D. who
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Quiz
6.
7.
8.
9.
State the basic economic problem.
What is opportunity cost?
List the four stages of the business cycle.
Explain the difference between supply &
demand.
10. (T/F) Equilibrium is the point where supply
equals demand.
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