Economics Chapter 1

Trade offs

Alternative choices, whenever they make an economic decision -butter guns

Needs

Basic requirement for survival Ex: food, clothing, shelter

Prediction

Can help to make the best decision in many situations. Predict what may happen in the future Ex: Economists predict house values will decrease in the next 2 years

Free enterprise economy

Consumers and privately owned businesses. make the majority of the WHAT, HOW, and FOR WHOM decisions

Relationship between goods, services, and consumers

Consumers uses goods and services to satisfy their wants and needs

Why is economics considered a social science?

Deals with people's behavior as they cope with scarcity

Capital goods

Goods are used to produce other goods Ex: factory machinery, trucks

Nondurable goods

Goods that lasts less than 3 years when used on a regular basis

Durable Goods

Goods that lasts more than 3 years when used on a regular basis

Specialization

FOP perform tasks that they can do more efficiently than others (A focus on a particular activity or area of study)

Explain why economic education is important

Helps people become better decision makers

Analysis

Helps us to discover why things work and how things happen

Fundamental economic problem facing all societies:

Scarcity

WHAT to Produce?

Society cannot have everything its people want, so it must decide WHAT to produce

Economic interdependence

Rely on others and others rely on us, to provide the goods and services that we consume -Increases in specialization and division of labor causes more

free products

air, sun, no one could own them

Explain why services are excluded from the measure of wealth?

because they are intangible

Consumer good

intended for final use by individuals

Identify the economic concept illustrated by the production possibilities frontier

opportunity cost

Standard of living

quality of life based on the possession of the necessities and luxuries that make life easier

Opportunity cost

the cost of the next best alternative Ex: the opportunity cost of going to a football game instead of working would include the money not earned at your job

Describe the nature of an opportunity cost

the cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Scarcity

-Not having enough resources to satisfy every need. -Satisfy unlimited wants with limited resources -Affects almost every decision we make -Some people tried to solve it (Marx, Smith, Keynes)

Land

-"gifts of nature" -natural resources -limited/fixed supply Scarcity likely to become worse as population grows

Labor

-Work force, size, education, quality, and work ethic -People with all their efforts, abilities, and skills

Cost-Benefit analysis

-A way of thinking about a problem that compares the costs of an action to the benefits received -decision-making method that compares marginal costs and marginal benefits

Value

-A worth that can be expressed in dollars and cents UTILITY + SCARCITY = VALUE

Productivity

-Ability to produce vast amount of goods in an efficient manner. American capitalist economy is productive: -We use our resources efficiently -Specialize to increase efficiency and productivity -Invest in human capital (labor pool)

Product Markets

-After individuals receive their income from the resources they sell, they spend it in product markets -Markets where producers sell their goods and services to consumers -Businesses then use this money to produce more goods and services -Markets serve as the main links between individuals and businesses -Money provides payments for goods, services, and factors of production

Utility

-Capacity to be useful and provide satisfaction -Good or service does not have to have utility for everyone

Scope of economics

-Description -Analysis -Prediction -Explanation

Service

-Work that is performed for someone -Intangible, cannot be touched

"There is No Such Thing as a Free Lunch" (TINSTAAFL)

-Everything we do has a cost, even if it seems as if we are getting something for free -Not everything is free because someone has to pay for the production

Economic products

-Goods and services that are useful, scarce, and transferable to others -Command a price

The Factors of Production

-Land -Capital -Labor -Entrepreneurs Required if goods and services are to be produced

Entrepreneurs

-Risk taker in search of profits who does something new with existing resources

HOW to Produce?

-Should factory owners use mass production that require a lot of equipment and few workers? -Should they use less equipment and more workers?

Want

-Something we would like to have, but is not needed for survival -Way of expressing a need

Human capital

-Sum of the skills, abilities, health, and motivation of people -Investments in human capital and physical capital can increase production and promote economic growth -Faster economic growth increases the amount of goods/services available to us

Goods

-Tangible commodity -Satisfies an economic want

Production Possibilities frontier

-Various combinations of goods and services an economy can produce when all productive resources are fully employed -Production can take place anywhere on or inside the frontier -All points on the curve represent maximum combinations of output possible if all resources are fully employed -All points inside the frontier occurs when some resources are not being used to their maximum capability

Three Basic Questions

-WHAT to Produce? -HOW to Produce? -FOR WHOM to Produce? Answer: butter guns, satisfy people's unlimited wants

Production

-creating goods and services

Capital

-investment monies -tools, equipment, machinery, and factories used in the production of goods and services

Explanation

Economic problems will be much easier to address or even fix in the future

Factor Markets

Individuals earn their incomes in these markets, where productive resources are bought and sold

Explain why economists argue that productivity is important

Its the efficient use of productive resources. The more efficiently productive resources are used, the greater the number of goods and services that are produced

Describe the factors of production required to deliver a service like education

Land: land, natural resources Capital: school building, computers Labor: teachers Entrepreneurs: new methods of delivery of educational material

Economic Growth

Nation's total output of goods and services increases over time -*Productivity is responsible for economic growth* -Circular flow becomes larger, with more FOP, good, and services flowing in one direction, and more payments flowing in the opposite direction -

Paradox of Value

Necessities (water) have little monetary value, whereas non-necessities (diamonds) have a much higher value -Exists because of scarcity

Description

Need to know what the world around us looks like

Consumers

Person who uses goods and services to satisfy wants and needs

Consumption

Process of using up goods and services in order to satisfy wants and needs

Product Markets vs factor markets

Product markets are producers selling goods and services while factor markets are resources being bought and sold

Financial Capital

The money used to buy the tools and equipment used in production

Wealth

Sum collection of economic products that are tangible, scarce, and useful

FOR WHOM to Produce?

Things produced must be given to someone after WHAT and HOW to produce is answered

What is the solution to the paradox of value?

Utility

Circular Flow of Economic Activity

Wealth that an economy generates

Economics

study of how people try to satisfy their endless wants with limited resources

Division of labor

takes place when work is arranged so that individual workers do fewer tasks than before (different people perform different jobs)

conspicuous consumption

use of goods to impress others