The Science ofEconomics

Unit 1

Macroeconomics is thebranch of economicsthat examines thebehavior of the whole

Microeconomics is thebranch of economicsthat examines thechoices of individualsconcerning one product,one firm, or oneindustry.

economy at once.

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Economics is the study of how people try tosatisfy what appears to be seeminglyunlimited and competing wants through thecareful use of relatively scarce resources.

The fundamental economic

problem facing all societies isScarcity.

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Scarcity is the condition that results for society not having enough resources to produce all the things people would like to have.

A need is a basicrequirement forsurvival and includesfood, water andshelter.

A want is a way ofexpressing a need.Since a variety of wantscan satisfy a need,wants tend to bebroader than needs.

There is no such thing as afree lunch

How many people touched this product?

How did this productget to the table inyour house?

List from the farmerto the grocer.

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

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WHAT

To Produce

HOW

To Produce

FOR WHOM

To Produce

CHOICES

SCARCITY

Seemingly

Unlimited

Wants

Limited

Resources

You are the leaders of a third world country. You

have a major problem: You do not have enoughresources to feed and take care of the healthcareneeds of your people. You must make decisions.Who do

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you feed or provide healthcare

Food

?

?

?

for?

Healthcare

?

?

?

1

11

61

-

–

–

years

years

years

old

old

old

30%

50%

20%

You cannot exceed1 million.

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◦ 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.Land

LaborCapital

Entrepreneurship(Management )

The entire material universe exclusive ofpeople and their products

◦

This concept thus includes not merely the dry surface ofthe earth, but all natural materials, forces andopportunities.

The trees in a virgin forest are land; in a cultivated

forest

they are wealth.

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◦Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land.

All human exertion in the productionof wealth

◦ All who participate in production bytheir mental and/or physical effort arelaborers in the economic sense. Thiswouldskills.

include their efforts, abilities and

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Wealth used to produce more wealth, orwealth in the course of exchange.◦ A machine is wealth. If used to produce shoes

or other wealth, the machine is wealth that iscapital (capital good). So also would amerchant’s stock (inventory) of goods in tradebe capital because the final exchange is notbeen completed.

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Some economist include workers thathave a special status because they arethe innovators responsible for much ofthe change in our economy.

An entrepreneur is a risk-taker in searchof profits.

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When all factors of production(land, labor, capital andentrepreneurship) are present,production, or the process ofcreating goods and services, cantake place.

Note!! Everything we produce

require these factors.

GDP –The total production ofgoods and services created withina country during a calendar year.

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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

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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Why are some necessities, such as water,have little monetary value while somenon-necessities like diamonds, have amuch 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

satisfaction◦ Wealth – is the accumulation of products that arefromtangible, scarce, useful, and transferable

one person to another.

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A market is a mechanism that allows buyersand sellers to exchange a certain economicproduct.◦ Factor Markets – are where productive resources

bought and sold.are

◦ Product Markets – are where producersconsumers.

sell theirgoods and services to

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Circular FlowProduct Markets$

Supply ConsumerSpending

BusinessIncome

Purchases

Goods &Services

Businesses IndividualsSell

Land, LaborCapital

Entrepreneurs

BuyProducti

veResourcesPayments for

ResourcesIncome fromResources

Factor Markets

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◦ Economic growth occurs when anation’s total output of goods andservices 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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Human Capital is the sum of theskills, abilities, health, andmotivation 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 isarranged so that individual workers dofewer tasks than before.

Specialization takes place when factors ofdoproduction perform tasks that they can

others.relatively more efficiently than

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Economic Interdependencemeans that we rely onothers, and others rely onus, to provide the goods

and servicesconsume.

that we

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Take a simple wooden pencil and list thepeople that contributed to this item from itsconception to my classroom.

Economic Interdependence

It is not from the benevolence ofthe butcher, the brewer, or thebaker, that we expect our dinner,but from their regard to their owninterest.

Led by an invisible hand to

promote

an end which was no part of his

intention. By pursuing his own

interest he frequently promotes

that

of the society more effectually

than

when he really intends to promoteit.

Getting cargo from point to point, on timeand in good condition

Back in the 1700s, the British government paidsea captains to take felons to Australia. Abouta third of the males on one particularly horrificvoyage died. The rest arrived beaten, starved,and sick. I mean, they were hobbling off, thosewho were lucky enough to survive.

This was a scandal back in England, so thegovernment tried to fix it with all different kindsof rules. Force the captains to bring a doctoralong. Require them to bring lemons to prevent

scurvy. Have inspections.

The clergy begged the

captains, for

humanity’s

sake, to take better

care

of the prisoners.No dice.

Raise captains’ salaries.

None of it worked.

Instead of paying for

each

prisoner thatwalked on the ship in Great Britain, thegovernment should only pay for eachprisoner that walked off the ship in Australia.And in fact, this was the suggestion which in1793 was adopted and implemented. Andimmediately, the survival rate shot up to 99%.

Before the captains were paid to keep theconvicts alive, they had different incentives —"like keep food from the prisoners, and thensell the food in Australia,“ they were alreadypaid for the prisoners.

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

Allocation

What need will be satisfied?

What resource will be used?

How much of the resource

will

used?

be

Trade-Offs Choosing among alternatives to satisfy

allocation

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Every decision we make has its trade-offs oralternative choices. When you make aneconomic decision (a choice) opportunityare incurred.

Opportunity Cost

cost

◦ The value of what you give up

when you make a choice.

Opportunity BenefitThe value of what you gain by

making that choice.

◦

The various combination of goods andservices that an economy can choose toproduce.

When an economy is operating at full capacity

it is operating at maximum production. Thisis also known as the production possibilitiesfrontier.

Production possibilities

help

us understand the conceptof opportunity cost.

70D

60

50 A

40Guns B

30 E

20

C10

0 100 200 300 400 500 600 7000

Butter

If you are operating at maximum production, theonly way to produce something new you must giveup 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

both

without giving up production.

Cost benefit analysis is a way to look at thebenefit received from an economic action.

A free enterprise economy is an economicsystem where business and consumersanswer the majority of WHAT, HOW andWHOM questions.

Standard of Living is the quality of life basedon the possessions of the necessities andluxuries that make life easier.

Citizenship – The study of economics helpsus become better decision makers.

The World – Economics provide a

framework

for analysis – a structure that helps explain

how things are organized.