Post on 07-Mar-2018
The Science of
Economics
Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.
Broadly defined, Economics is the social science that deals with how society allocates resources among its unlimited wants and needs.
Microeconomics is the branch of economics that examines the choices of individuals concerning one product, one firm, or one industry.
Macroeconomics is the branch of economics that examines the behavior of the whole economy at once.
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How did this product get to the table in your house?
List from the farmer to the grocer.
How many people touched this product?
The fundamental economic
problem facing all societies isScarcity.Scarcity is the condition that
results for society not having enough resources to produce all the things people would like to have.
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There is no such thing as a free lunch
Seemingly
Unlimited Wants
Limited Resources
SCARCITY
CHOICES
WHAT
To Produce
HOW
To Produce
FOR WHOM
To Produce
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What to Produce◦ Should they produce
military goods or food?
How to Produce◦ Should they use
equipment and few people or use more people and less equipment?
For Whom to Produce◦ How are the things
produced allocated?
All the processes involved in making wealth and bringing it from its place
of origin to the ultimate consumer.
LandLabor
Capital Entrepreneurship
(Management )
The entire material universe exclusive of people and their products
◦ Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land.
This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities.
The trees in a virgin forest are land; in a cultivated forest they are wealth.
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All human exertion in the production of wealth
◦ All who participate in production by their mental and/or physical effort are laborers in the economic sense. This would include their efforts, abilities and skills.
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Wealth used to produce more wealth, or wealth in the course of exchange.◦ A machine is wealth. If used to produce shoes
or other wealth, the machine is wealth that is capital (capital good). So also would a merchant’s stock (inventory) of goods in trade be capital because the final exchange is not been completed.
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Some economist include workers that have a special status because they are the innovators responsible for much of the change in our economy.
An entrepreneur is a risk-taker in search of profits.
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When all factors of production (land, labor, capital and entrepreneurship) are present, production, or the process of creating goods and services, can take place.
Note!! Everything we produce require these factors.
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Description◦ Describing Economic Activity
Analysis◦ Trying to determine “why”
something happens
Explanation◦ Using Economic theory to
explain how things work
Prediction◦ Using Economic events to
predict future economic activity
Basic Economic Concepts◦ Goods – items that are economically useful or
satisfies an economic want
Consumer Goods – used by individuals
Capital Good – Goods used to produce more goods
◦ Services – work that is preformed for someone
◦ Consumer(s) – a person who uses a good or service
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◦ Value – worth that can be expressed in dollars
◦ Utility – the capacity to be useful and provide satisfaction
◦ Wealth – is the accumulation of products that are tangible, scarce, useful, and transferable from one person to another.
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Why are some necessities, such as water, have little monetary value while some non-necessities like diamonds, have a much higher value?◦ Economist know that scarcity is required for
value.
A market is a mechanism that allows buyers and sellers to exchange a certain economic product.◦ Factor Markets – are where productive resources are
bought and sold.
◦ Product Markets – are where producers sell their goods and services to consumers.
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Business Income
Consumer Spending
Product Markets
Factor Markets
Businesses Individuals
Payments for
ResourcesIncome from Resources
Goods & Services
Buy Productive Resources
Circular Flow
Sell
Land, Labor Capital
Entrepreneurs
$
Supply
Purchases
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◦ Economic growth occurs when a nation’s total output of goods and services increases over time.
◦ Economic productivity is a measure of the amount of output produced by a given amount of inputs during a specific period of time.
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Division of Labor takes place when work is arranged so that individual workers do fewer tasks than before.
Specialization takes place when factors of production perform tasks that they can do relatively more efficiently than others.
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Human Capital is the sum of the skills, abilities health, and motivation of people.◦ Government & Businesses can invest in
human capital (labor) by providing education (training) and health care to improve the skill and motivation of its workers.
Economic Interdependencemeans that we rely on others, and others rely on us, to provide the goods and services that we consume.
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Allocation
What need will be satisfied?
What resource will be used?
How much of the resource will be used?
Trade-Offs
Choosing among alternatives to satisfy allocation
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Opportunity Cost
◦ The value of what you give up when you make a choice.
Opportunity Benefit
◦ The value of what you gain by making that choice.
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The various combination of goods and services that an economy can choose to produce.
When an economy is operating at full capacity it is operating at maximum production. This is also known as the production possibilities frontier.
Production possibilities help us understand the concept of opportunity cost.
Butter
Guns
A D
EB
70
60
50
40
30
20
10
0
0 100 200 300 400 500 600 700
C
Cost benefit analysis is a way to look at the benefit received from an economic action.
A free enterprise economy is an economic system where business and consumers answer the majority of WHAT, HOW and WHOM questions.
Standard of Living is the quality of life based on the possessions of the necessities and luxuries that make life easier.