chapter 1 economics. the social science dealing with the study of how individuals and countries make...

CHAPTER 1CHAPTER 1Economics

Economics• the social science dealing with the

study of how individuals and countries make choices about ways to use their scarce resources to fulfill or satisfy their wants.

• Comes from Greek word oikonomia which means “one who manages a household.”

Economics(Continued)

• Economics studies how people make decisions: some examples, how much they work, what they buy, how much they save, how they invest.

• Economics also studies how people interact with one another: for example, how buyers and sellers determine the price and quantity of a good that is sold.

• Economics also analyzes forces and trends that affect the economy as a whole: some examples, the growth of average income, the fraction of the population that is unemployed, and the rate at which prices rise.


• Economics is all about making choices.

• Countries and people use their resources in different ways.

• A country might like to spend money on improving the lives of its people or on building up its defenses.

• A person might like to spend money eating out or buying a new DVD player.


• Land can be used for farming, for business, or for housing.

• However, people and governments cannot do all the things they want. They must make choices.

• If they choose to spend money on one thing, they have less to spend on something else.

Economy• all the activity in a country that together

affects the production, distribution, and use of goods and services.

• This is where the choice of economics takes place.

• It is simply, individuals interacting with one another as they go about their lives.

Resource• anything that can be used to obtain a need

or a want.

• The need to make choices arises from the fact that everything that exists is limited.

• We have to make choices because our wants and needs are greater than our resources.

Scarcity• the fundamental economic problem

that faces all societies, where people do not have enough income or resources to satisfy their every desire.

• It means that people want more than what is available.

• Scarcity is the main concern of economics.

Scarcity(Continued)

• We’ve all experienced scarcity in our lives. For example, when you want to go see a movie that costs more money than what you have in your pocket, you have experienced scarcity.

• A country may want to spend more resources on education and health, but it may not be able to because it also has to pay for roads and defense.

• A business has to make decisions about which goods and services to make, and how much to make.

Needs•a basic requirement for survival; something that is necessary to remain alive.

Basic Needs (Individual)

1. Food/Water (Nourishment)

2. Clothing3. Shelter

Basic Needs (Governments)

1.Strong Defense

2.Good Education

3.Safe Environment

Wants•something that is not needed to survive but that makes life better.

You Win $10,000!

Imagine that you suddenly win $10,000!

• You might buy a new car or high definition television.

• You might take a trip or save the money for college.

Imagine that you suddenly win $10,000!

THREE BASIC QUESTIONS OF EVERY ECONOMIC SYSTEM

1. What to Produce?--should a society direct most of its resources to the production of military equipment or to other items such as food and housing? A society can’t have everything that its people want, so it must decide what to produce. People choose the kinds of goods and services to produce. They may decide to use scarce resources to make cars. This means there are fewer resources to spend on other products like dishwashers and stoves. Also a farmer must choose what to produce (corn, wheat, soybean, etc…).


2. How to Produce?—should factory owners use mass production methods that require a lot of equipment and fewer workers, or should they use less equipment and more workers.

• For example, there are many ways to farm; there are many ways to build a house (wood, brick, steel, etc…).


3. For Whom to Produce?—who should get the products that are produced? Should only those people who have enough money to buy the goods and services get them? Should the government decide who gets them?

• In some countries, a small group of very rich families receives most of what is produced. The large numbers of poor people in these countries get very little.


• Most rich countries have a large group of people who are neither rich nor poor. Rich countries also have a small number of very rich people and very poor people. Almost all people have a chance to get the goods and services produced.

• Some countries try to even out the amount of money workers earn. No one is very rich, but no one is very poor.

Factors of Production• Resources that are used to

produce goods and services.

• These are required to produce goods and services.

4 FACTORS OF PRODUCTION

1. Land—natural resources not created by humans; “gifts of nature.” Some of these resources are water, mineral deposits, livestock, forests, farmland, deserts, and climate. There is not an endless supply of these resources. These natural resources typically go to whoever can pay the most for them. There is not enough fertile farmland, nor sandy beaches, nor oil and minerals.


2. Capital—the buildings, tools, equipment, money, machinery, and factories used in the production of goods and services.

3. Labor (human resources)—the work people do to provide goods and services through their efforts, abilities, and skills. Labor may vary in size over time. Historically, factors such as population growth, immigration, famine, war, and disease have impacted the quantity and quality of labor.


4. Entrepreneurs—a person who is a risk-taker in search of profits who does something new with existing resources.

Economic Products

• goods and services that are useful, relatively scarce, and transferable to others.

• There are two types: Goods and Services.

GOODS & SERVICES• Goods—the things people buy.• Services—the things done for others for a

specific fee.• Consumer Goods—a good that is

intended for final use by individuals.• Capital Goods—manufactured goods that

are used to produce additional goods and services, for example an oven in a bakery. The oven is a good that is used to make the bread or cake.

GOODS & SERVICES• Durable Goods—any goods that

lasts three years or more when used on a regular basis. (Examples: car, television, washing machine, etc…)

• Nondurable Goods—any goods that lasts for less than three years when used on a regular basis. (Examples: clothing, food, paper, etc…)

VALUE• Value—a worth that can be expressed in dollars

and cents.• Paradox of Value—the situation where some

necessities have little monetary value, whereas some non-necessities have a much higher value. For example, water has little monetary value where it is so plentiful and abundant. On the other hand, diamonds are so scarce that they have great value. But scarcity by itself does not create value.

Utility• The power a good or service has to satisfy

a want.

• This can change among different individuals or change as a result of circumstances.

Wealth• The accumulation of those products that

are tangible, scarce, useful, and transferable from one person to another.

• A nation’s wealth is comprised of all items, including natural resources, factories, stores, house, hotels, furniture, clothing, gooks, highways, and even video games.

Productivity• The amount of goods and services workers can produce in a given period of time.

PRODUCTIVITY(Continued)

• Let’s say you work at a restaurant. You usually cook 20 hamburgers per hour.

• The owner buys a new grill. • Now you can cook 40

hamburgers in the same amount of time.

• Your productivity has increased.

Division of Labor• Dividing up workers so that each

worker completes one job, which is one part of a larger job.

Division of Labor(Continued)

• Henry Ford changed the way cars were made. This change is a good example of how productivity can increase.

• Long ago, one person built an entire car from start to finish. Only a small number of cars were made. The price was so high that only the rich could afford them.

• Ford felt that he could build cars in a better way. He developed the division of labor. Instead of building a whole car, workers performed only one job.

Specialization• When an employee performs a

particular task rather than all of the tasks of an operation.

• This assignment assures that each worker performs fewer functions more frequently.

ADVANTAGES OF SPECIALIZATION

1. Increased production

2. Workers develop greater skill

3. Production becomes more efficient

4. Lowers cost

5. Employment of people who might otherwise be unemployed

6. Continuous and economical use of equipment.

7. Develops a spirit of independence among workers

DISADVANTAGES OF SPECIALIZATION

1. Work can become monotonous and boring

2. Workers become dependent on each other

3. Not as much pride in work

4. Efficient worker may be stuck in the same job

5. Relocation to another job may be hard due to the need for new skills

Human Capital

• The sum of skills, abilities, health, and motivation of people.

• * Governments can invest in human capital by helping to provide education and health care. Businesses can invest in training and other programs that improve the skill and motivation of its workers. Individuals can invest in their own education by completing high school, going to technical school, or going to college.

• * High school graduates have substantially higher incomes than non-graduates, and college graduates make even more than high school graduates. Educational investments require that we make a sacrifice today so we can have a better life in the future.

Economic Interdependence

• An economic activity in one part of the country or world that affects what happens elsewhere.

• For example, bad weather in countries where sugar cane is grown can affect prices in the U.S.

• Also for example, if a professional sports team moves to a new city. That can affect thousands of people by creating jobs for people who park cars, sell tickets, serve food, and sell apparel.

Trade-offs• The act of giving up one thing for another.

EXAMPLES OF TRADE-OFFS

1. Consider a student who must decide how to allocate his time. He can spend all of his time studying economics; he can spend his entire time studying math; or he can divide his time between the two fields. For every hour he studies one subject, he gives up an hour he could have used studying the other. And for every hour he spends studying, he gives up an hour that he could have spent napping, bike riding, watching TV, or working at his part-time job for extra spending money.

2. The classic tradeoff is between “guns and butter.” The more we spend on national defense (guns) to protect our shores from foreign aggressors, the less we can spend on consumer goods (butter) to raise our standard of living at home.

3. If land is used to plant crops and grow corn, then it can’t be used as a golf course.

4. Consider the tradeoff between a clean environment and a high level of income. Laws that require firms to reduce pollution raise the cost of producing goods and services. Because of the higher costs, these firms end up earning smaller profits, paying lower wages, charging higher prices, or some combination of these three. Thus, while pollution regulations give us the benefit of a cleaner environment and the improved health that comes with it, they have the cost of reducing the incomes of the firms’ owners, workers, and customers.

Opportunity Cost

• The next best alternative that had to be given up for the alternative chosen. The cost of choosing one choice over another; whatever must be given up to obtain some item. Every time we make a choice, we give up an opportunity to do something else.

EXAMPLES OF OPPORTUNITY COST

1. Going to college may mean that you delay having enough money to move out on your own. Finding a full-time job may mean more money in your pocket now but less in the future. In general, college graduates earn more money than people whose education ends with high school.

2. A farmer decides to use his land to grow corn instead of turning the property into a golf course. The opportunity cost for having farmland growing corn is the absence of a golf course.

• * The study of economics does more than explain how people deal with scarcity. Economics also includes the study of how things are bought, sold, made, and used.

Production Possibilities Frontier

• It shows the various possible combinations of output that can be produced when all resources are fully employed; production inside the frontier occurs when some resources are idle or are not being used to their maximum capability.

• When economic growth takes place, the production possibilities frontier shifts outward, showing that more products are produced than before.

AREAS THE STUDY OF ECONOMICS CAN INFLUENCE

1. Topics and Issues—the study of economics will provide a working knowledge of property rights, competition, supply, demand, the price system, and the economic incentives that make the U.S. economy function.

2. Economics for Citizenship—the study of economics helps us to become better decision makers—both in our personal lives and in the voting booth. Economic issues are often debated in political campaigns.

3. Making Rational Choices—the study of economics helps us to take the things with greater value and give up those with lesser value. We begin to analyze, in greater detail, the choices we make. We begin to make decisions rationally.

• * The study of economics will make you a better decision maker and will help you to understand the world around you; however, the study of economics will not tell you which decisions to make.

chapter 1 economics. the social science dealing with the study of how individuals and countries make...

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scarce resources

basic questions

experienced scarcity

choice of economics

needsa basic requirement

main concern of economics

new car

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