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.