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Unit 1

The

Science of
Economics

Microeconomics is the

branch of economics
that examines the
choices of individuals
concerning one product,
one firm, or one
Rindustry.

Macroeconomics is the
branch of economics
that examines the
economy at once.
behavior of the whole

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.

The fundamental economic


problem facing all societies is
Scarcity.
Scarcity is the condition

that results for society


not having enough
resources to produce all
the things people would
like to have.
R

A need is a basic

A want is a way of

requirement for

expressing a need.

survival and includes

Since a variety of wants

food, water and

can satisfy a need,

shelter.

wants tend to be
broader than needs.

There

is no such thing as a
free lunch

How many people touched this product?

How did this product


get to the table in
your house?

List from the farmer


to the grocer.
http://www.youtube.com/watch?v=l-bflQuRLbU

Seemingl
y

Limite
d

Unlimite
d

Resources

Wants

SCARCITY

WHA
T

CHOICE
S
HO
W

To

To

FOR WHOM
To Produce

You are the leaders of a third world country.


You
have a major problem:
You do not have enough
resources to feed and take care of the healthcare
needs of your people. You must make decisions.
Who do you feed or provide healthcare for?

- 10 years old

30%

11 60 years old

50%

61 85 years old

20%

You cannot exceed


1 million.

Food

Healthcare

?
?
100% You have a population

of

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

All the processes involved in


making
wealth and bringing it from its
place
of origin to the ultimate consumer.
Land
Labor
Capital
Entrepreneurship

The entire material universe exclusive of


people
and theirphysical
products
Everything
(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
R

they are wealth.

All human exertion in the production


of wealth

All who participate in production by


their mental and/or physical efort are
would
laborersinclude
in the economic
sense.abilities
This
their eforts,
and
skills.

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
merchants stock (inventory) of goods in trade
be capital because the final exchange is not
been completed.

Some economist include workers that


have a special status because they are
the innovators responsible for much of

An entrepreneur is a risk-taker
the change in our economy.
of profits.

in search

When all factors of production


(land, labor, capital and
entrepreneurship) are present,
production, or the process of

creating
goods and we
services,
can
Note!! Everything
produce
require
these factors.
take
place.

GDP The total production of


goods and services created within
R

a country during a calendar year.

Use the pictures below.


depicted?

What are the factors

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

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
R

service

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.

Value worth that can be expressed in dollars


Utility the capacity to be useful and

provide
Wealth is the accumulation of products
satisfaction

that are

tangible, scarce, useful,


one person to another.

from

and transferable

A market is a mechanism that allows buyers

and sellers to exchange a certain economic


Factor Markets are where productive resources
product.
bought and sold.

where producers
Product Markets are
goods and services to
consumers.

sell their

are

Circular Flow
$
Supply
Purchases

Product Markets
Business

Consumer

Income

Spending

Goods &
Services

Businesses
Sell
Buy
Producti

Payments for
Resources

ve

Land, Labor
Capital

Entrepren
eurs

Resources

Income from
Resources

Factor Markets
R

Individuals

Economic growth occurs when a


nations 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.

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.

Division of Labor takes place when work is


arranged so that individual workers do

fewer
tasks than
before.
of
Specialization
takes
place when factors
they can
production perform tasks that
do
relatively more eficiently than
others.

Economic Interdependence

means that we rely on


us, to provide
others,
and others
the goods
rely on
and services that we
consume.

Take a simple wooden pencil and list the


people that contributed to this
item from its
conception to my classroom.

Economic Interdependence

It is not from the benevolence of


the butcher, the brewer, or the
baker, that we expect our dinner,

but

from their regard to their own

interest.

Led by an invisible hand to


promote
an end which was no part of his
intention. By pursuing his own
interest he frequently promotes

Getting cargo from point to point, on time


and in good condition

Back in the 1700s, the British government paid

sea captains to take felons to Australia. About


a third of the males on one particularly horrific
voyage died. The rest arrived beaten, starved,
and sick. I mean, they were hobbling of, those
who were lucky enough to survive.

This was a scandal back in England, so the


government tried to fix it with all different kinds

of rules. Force the captains to bring a doctor


scurvy. Have inspections.
Raise captains salaries.

along. Require them to bring lemons to prevent

The clergy begged the


captains, for
humanitys
sake, to take better

care
None of it worked.
of the prisoners.

Instead of paying for

prisoner that

each

walked on the ship in Great Britain, the


government should only pay for each
prisoner that walked of the ship in Australia.
And in fact, this was the suggestion which in
1793 was adopted and implemented. And
immediately, the survival rate shot up to 99%.

Before the captains were paid to keep the


convicts alive, they had different incentives
"like keep food from the prisoners, and then
sell the food in Australia, they were already
paid for the prisoners.

they
arrive alive.
The answer
is to reward the captains for
keeping the passengers alive, and voila!

Allocation

What need will be satisfied?


What resource will be used?

How much of the resource


will
used?
Trade-Offs

Choosing
among
alternatives to
satisfy

be

Every decision we make has its trade-ofs or


alternative choices.
When you make an
economic decision (a choice) opportunity
cost
are incurred.

The value of whatCost


you give up
Opportunity
when you make a choice.

Opportunity

Benefit

The value of what you gain by

The various combination of goods and


services that an economy can choose to

produce.
it is operating at maximum production.
This
When an economy is operating at full capacity
is also known as the production possibilities

frontier.

Production possibilities
help
us understand the concept

70
D

60
50

Guns

40

30

20
C

10
0

100

200

300

400 500

Butter

600

700

If you are operating at maximum production, the

only way to produce something new you must give


up the production of another item.

If you have economic growth you can push the


curve outward allowing for more total
production.

(Population Growth, Improving Technology, or growth in the


Capital
Stock which are investments in factories, etc.)

If you have idle resources (operating inside


the
curve) you will be able to produce more of

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

questions.
WHOM
Standard
of Living

is the quality of life based

on the possessions of the necessities and


luxuries that make life easier.

Citizenship The study of economics helps


us become better decision makers.

The

World Economics provide a

framework
for analysis a structure that helps explain
how things are organized.