When do we actively participate in the economy?

When we:

1. Spend money

2. Work

What do economists do?

Study our behavior in the economy and attempt to determine the outcomes of these decisions, improve the economy and predict future changes.

What type of a science is economics and what is its goal?

What is the difficulty with economics?

It is not an exact science.

As a social science, it attempts to explain human behavior. Economists assume people will be rational, value money, and make choices based on preferences. Human behavior is complex, changing and inconsistent so economists have to make the best assumptions possible.

What categories is economics divided into?

1. Microeconomics

2. Macroeconomics

MICROECONOMICS

• The study of economics on a small scale.
• Includes studying the behavior of: firms (businesses), households, and industries.

MACROECONOMICS

• The study of economics on a much larger scale; the study of the entire economy.
• Includes studying: government economic policies and international trade

ECONOMICS

The study of how people satisfy seemingly unlimited wants with limited resources

SCARCITY

1. The fundamental economic problem.

2. Lack of resources; we do not have enough resources to satisfy all of our wants.

What are two facts about scarcity?

1. It is a constant; we can never get rid of it.

2. Scarcity is not poverty-it is just as much a problem for the rich as it is for the poor.

What does scarcity force us to do?

Scarcity forces us to choose between two alternatives. We cannot have everything, so we make choices and trade-offs.

What do economists assume people will do with respect to needs and wants?

Assume people will buy what they need first, and what they want second.

Need

•  Anything required in order to function in society.
• Examples: food, clothing, shelter, water, transportation

Want

• The way we satisfy our needs
• Examples:

1. We need food, but want pizza.
2. We need transportation, but want a Ferrari.
3. We need pants, but want Lucky jeans.
   

Trade-off

The exchange of one thing for another; we are trading the item we do not choose for the item we do choose.

Economic analysis

An illustration of trade-offs and choices.

SCARCITY

• The fundamental economic problem. We do not have enough resources to satisfy all of our wants.
• "Lack of resources"

Let's Check Your Mastery

1. Economics is the study of the flow of money in societies.

(a) true

(b) false

(b) false

Economics is a lot more than just the study of money. It is the study of how people satisfy seemingly unlimited wants with limited resources.

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2. The fundamental economic problem is that we do not have enough resources to satisfy all of our wants.

(a) true

(b) false

(a) true

The fundamental economic problem is scarcity, which is the gap between unlimited wants and limited resources.

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3. An example of a need is food, while an example of a want is a gourmet sandwich.

(a) true

(b) false

(a) true

Needs are everything we have to have to function in society, while wants are ways of satisfying our needs.

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4. Economics is an exact science.

(a) true

(b) false

(b) false

Economics is a social science that attempts to explain ever-changing human behavior.

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5. In the earlier example about John, John traded a car for dates and video games.

(a) true

(b) false

(a) true

John could have had a car if he would have saved his money rather than spending it on video games and dates. He could not have both a car and video games; therefore, he traded his car for dates and video games.

OPPORTUNITY COST

The value of the best forgone alternative (to forgo something is to do without it). It is basically the value of the best item we gave up.

For every economic choice we make, there is an opportunity cost.

How do economists analyze peoples' choices?

Through cost-benefit analysis. 

They ask why people make specific economic choices; come to the conclusion that the benefit must outweigh the cost of the choice.

COST-BENEFIT ANALYSIS

Looking at the costs and benefits of a choice and then deciding if the benefits outweigh the costs.

When do we use cost-benefit analysis?

Whenever we make a list of the positive and negative effects of a choice.

What is the relationship between opportunity cost and cost-benefit analysis?

Let's Check Your Mastery

The opportunity cost of buying a candy bar for one dollar rather than a bag of chips for one dollar is the bag of chips.

(a) true

(b) false

(a) true

The opportunity cost is the forgone alternative. We bought the candy bar and we did not get the chips. The chips are the foregone alternative.

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You are invited to a party on Thursday night. You have a test in economics on Friday. You make a list of all of the positives and negatives of studying and all of the positives and negatives of going to the party. You decide to go to the party.

You were practicing cost-benefit analysis to make an economic decision.
(a) true

(b) false 

(a) true

Cost-benefit analysis is weighing all of the costs (negative outcomes) and benefits (positive outcomes) of a choice, and then making a decision. It doesn't imply that you made the correct choice, just that you analyzed the potential benefits and harm of making the choice and the proceeded according to your evaluation of the outcomes.

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You are invited to a party on Thursday night. You have a test in economics on Friday. You make a list of all of the positives and negatives of studying and all of the positives and negatives of going to the party. You decide to go to the party.

Going to the party has economic implications.
(a) true

(b) false 

(a) true

Because there was a choice (studying or partying) with limited resources (time), an economic decision had to be made. And while you might not have considered the monetary benefits or consequences involved in this cost-benefit analysis, they are real. This decision can potentially affect you in many ways: gas to go to the party and money to purchase food or other party amenities cost you money. If you fail the test, you might have to retake the course and that can cost you money. On the other hand, if you go to the party and meet a potential employer and succeed in impressing him or her with your wit and skill, you might gain a job through attending the party. Economics play s a role in many areas of your life.

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You are invited to a party on Thursday night. You have a test in economics on Friday. You make a list of all of the positives and negatives of studying and all of the positives and negatives of going to the party. You decide to go to the party.

The opportunity cost of going to the party was studying for the economics test.

(a) true

(b) false

(a) true

Since we went to the party, we did not have time to study. We gave up studying in order to go to the party. The foregone alternative is studying.

TINSTAAFL

"There is no such thing as a free lunch."

Means that from an economic point of view, virtually nothing is free. Goods, services, and resources are all scarce-meaning all things in the world have a finite, or limited, supply. Even if something is free to you, someone, somewhere, sometime has to pay for it.

Goods

Physical items such as food and clothing

Services

Labor such as accounting or cleaning

Resources

Time and money etc.

Economic good

Goods that can be bought or sold; scarce. They are not equally available to all. 

Examples: cars, food, cell phones

What is true of economic goods, services, and resources?

They are paid for at some point.

Free goods

Goods that are not bought or sold, are not scarce, and have no opportunity cost.

Examples: air, waste products such as discarded packaging

Are all products offered at a zero price considered free goods?

No, if it has an opportunity cost and/or is considered scarce it is not a free good.

 For example if there is a buy one get one free sale on T-shirts, the free shirt is not considered a free good, but an economic good.

VALUE

How much something is worth (price), how much people are willing to pay for something.

What determines the value of an economic good or service in a market economy?

Utility and scarcity.

UTILITY

The usefulness of a good. It measures the satisfaction a person gets from consuming an economic good.

One of the factors that determines the value of a good or service.

SCARCITY

(in determining the value of goods)

How much of that good is available.

One of the factors that determines the value of an economic good or service.

What is the importance of utility?

How useful something is will help determine its value to you.

Examples:

1. We all find food useful; therefore, it has a high utility

2. Most people don't find garbage useful; therefore, it is has a low utility

Do all goods and services have the same value (and utility) for every person in the economy?

No. Different goods and services are useful to different people; therefore, what is valuable to one person might not be valuable to another person.

Example: Antiques Roadshow

What can affect the value (and utility) of a particular good?

Cultural influences-

Societies place value on items based on their usefulness. Different cultures value different items.

Geographic factors (such as weather)

Example: an umbrella has a higher utility in a place where it rains a lot versus a place that gets little rain

Marginal benefit

MARGINAL BENEFIT

The benefit a person receives from consuming one more unit of a good or service.

It affects the individual utility of a good and therefore the value an individual person places on a good or service.

What is true about marginal benefit?

The benefits a person receives from consuming the first unit of a good or service is typically much larger than the benefit the same person receives from consuming an additional unit or units of the good or service.

WEALTH

The value of all of the goods, services, and resources a society or individual owns.

Let's Check Your Mastery

There is no such thing as a free lunch.

(a) true

(b) false

(a) true

From an economics perspective, no economic product is free. Someone pays for it.

Let's Check Your Mastery

The pen has a high utility for a writer when the ink is dry and it does not write.
(a) true

(b) false 

(b) false

Utility means usefulness. If a pen has a high utility, it would be very useful. A pen that does not work would have a low utility.

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Diamonds have a high value because they have a high utility and are scarce.

(a) true

(b) false

(a) true

Value is determined by utility and scarcity.

FACTORS OF PRODUCTION

Economic resources, or scarce inputs that are required to produce a good or service in order to satisfy human wants.

What are the factors of production?

(1) Land

(2) Labor

(3) Capital

(4) Entrepreneurs

LAND

More than just land; includes all natural resources necessary to produce a good or service.

Examples: timber, water, minerals

LABOR

All the people and the work they do in order to produce good and services.

CAPITAL

(1) Man-made goods that are required for the production process; anything that is bought in order to produce goods and services.

Examples: machines, buildings, tools

(2) The money needed to buy these things.

(3) Human capital 

Human capital

The training and development of employees. Employers invest in their employees hoping that training and knowledge will make their employees more productive.

ENTREPRENEUR

Persons who take risks and combine the other three factors of production and create a business. They come up with new, innovative ideas in order to make a profit.

What are entrepreneurs considered?

The driving force of the economy.

What drives the economy?

People want to make money, so they are motivated to work, develop new ideas, and open new businesses.

Incentives

Anticipated positive outcomes from a decision or set of decisions.

What are the types of economic incentives?

Monetary and non-monetary incentives

MONETARY INCENTIVES

Money incentives

Examples: 

(1) A paycheck

(2) A bonus

(3) A raise in pay

NON-MONETARY INCENTIVES

Incentives that do not have anything to do with money

Examples:

(1) Fame

(2) Personal Fulfillment

(3) Achieving goals

What motivates entrepreneurs to come up with new businesses and new ideas?

Both types of economic incentives:

Main motivator is profit; seek money and recognition.

Also motivated by non-monetary incentives such as fame and personal fulfillment.

PRODUCER

The maker of goods and services.

CONSUMER

The buyer of goods and services.

What are the four sectors of the economy where exchanges take place?

(1) Consumers

(2) Businesses

(3) Government

(4) Foreign

Consumers

Buy goods from businesses and the government. It is said that they are in charge of the economy.

Consumer sovereignty

The power of the consumer in the economy. The idea that wants originate within the individual, and businesses simply produce what the consumers want.

Businesses

Produce goods and services for consumers. They offer goods and services for sale. Basically produce what consumers want to buy.

Government

Plays a large role in the economy of a nation and in the economy of the world. May control the economy but in a capitalistic society seeks to help the economy run smoothly.

Foreign 

(imports and exports)

Many businesses in an economy produce goods strictly for foreign markets.

What is true of the sectors of the economy?

All of the goods within an economy are produced and consumed by one of the four sectors.

What is true about each sector?

Many organizations exist that have different rules and constraints; rules and constraints affect other organizations through exchanges and other transactions.

MARKET

An exchange between a buyer and a seller; can be local, regional, national, or international.

Examples:

(1) Me selling you an apple (local market)

(2) US selling planes to Great Britain (international market)

PRODUCT MARKET

A business exchanging finished products for consumers' money. The consumer buys the product for the purpose of consumption. The final destination of the good is the consumer.

FACTOR MARKET

(Input market) The inputs into the production process (land, labor, capital, entrepreneurship) are bought and sold in factor markets in order to produce another good.

Circular flow of economic activity

[image]

Shows the flow of the factors of production in the economy.

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An example of a monetary incentive is accomplishing a goal.

(a) true

(b) false

(b) false

A monetary incentive is a money incentive; accomplishing a goal is an example of a non-monetary incentive.

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An example of capital is a computer that a business uses for everyday transactions.
(a) true

(b) false 

(a) true

Capital is anything a business invests in so the business can operate. A computer is an example of capital.

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 A baker purchases flour so he can make goods and sell them in his bakery. The baker purchased the flour in a product market.

(a) true

(b) false

(b) false

Final purchases for consumption are made in product markets. A baker is purchasing flour for his business. Flour then becomes a factor of production because it is being used to produce a final good. Factors of production are bought and sold in factor markets.

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A businessman purchases flowers for his wife on his way home from work. The man purchased the flowers in a product market.
(a) true

(b) false 

(a) true

The man is going to give the flowers to his wife. The flowers are a finished product, so they are bought and sold in a product market. 

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Bill Gates is an example of an entrepreneur because he developed a company and started a business.

(a) true
(b) false

(a) true

The definition of an entrepreneur is a risk-taker. Developing a business and creating new technology is all part of being an entrepreneur.