What is Economics?What is Economics?

Chapter 1, Lesson TwoChapter 1, Lesson Two

Basic Economic ConceptsBasic Economic Concepts

Economics is concerned with Economics is concerned with economic products.economic products.

Definition:Definition:

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

Goods and ServicesGoods and Services A good is an item that is A good is an item that is

economically useful or satisfies an economically useful or satisfies an economic want, such as a book, car, economic want, such as a book, car, or MP3 Playersor MP3 Players

A consumer good is intended for final A consumer good is intended for final use by individuals.use by individuals.

When manufactured goods are used When manufactured goods are used to produce other goods and services, to produce other goods and services, they are called capital goods.they are called capital goods.

Goods and ServicesGoods and Services

Goods and ServicesGoods and Services

Goods and ServicesGoods and Services

Consumer Goods vs. Capital Consumer Goods vs. Capital GoodsGoods

If I use a computer at home for email If I use a computer at home for email and other personal use, it would be and other personal use, it would be considered a consumer good.considered a consumer good.

If the same computer is purchased If the same computer is purchased by an accountant and she uses it to by an accountant and she uses it to do people’s taxes, it is now a capital do people’s taxes, it is now a capital good because it is being used to good because it is being used to produced another service (taxes).produced another service (taxes).

Consumer Goods vs. Capital Consumer Goods vs. Capital GoodsGoods

An oven in my home that I use to An oven in my home that I use to bake casseroles for my family is a bake casseroles for my family is a consumer good.consumer good.

An oven in a bakery used to make An oven in a bakery used to make cookies and cakes that is sold to the cookies and cakes that is sold to the public is a capital good.public is a capital good.

ServiceService

Another type of economic product is Another type of economic product is service, or work that is performed for service, or work that is performed for someone. someone.

This could include a haircut, home This could include a haircut, home repairs, putting on a concert, doing repairs, putting on a concert, doing your taxes for you, representing you your taxes for you, representing you in a court of law, or even educating in a court of law, or even educating someone.someone.

ConsumerConsumer

A consumer is a person who uses A consumer is a person who uses goods and services to satisfy needs goods and services to satisfy needs and wants.and wants.

The Circular FlowThe Circular Flow

There are a few terms we must define There are a few terms we must define before you can understand the circular before you can understand the circular flow.flow.

Definitions:Definitions:

--The market is a location or other --The market is a location or other mechanism that allows buyers and mechanism that allows buyers and sellers to exchange a certain sellers to exchange a certain economic product.economic product.

The Circular FlowThe Circular Flow Definitions (cont.)Definitions (cont.)

--Factor markets are markets where --Factor markets are markets where factors of production (or resources or factors of production (or resources or capital goods and services) are bought capital goods and services) are bought and sold.and sold.

--Product markets are where --Product markets are where producers sell their goods and producers sell their goods and services and consumers buy those services and consumers buy those consumer goods and services.consumer goods and services.

The Circular FlowThe Circular Flow

Market for Goods andServices

Revenue

Market for Factors ofProduction

Firms Households

Wage, rent,and profit

Income

SpendingGoods andservices sold

Goods andservices bought

Labor, landand capital

Inputs forproduction

Value, Utility, and WealthValue, Utility, and Wealth

Value refers to a worth that can be Value refers to a worth that can be expressed in dollars and cents.expressed in dollars and cents.

What is the value of a bottle of water?What is the value of a bottle of water? What is the value of a 1 carat diamond?What is the value of a 1 carat diamond? What do you use the water for?What do you use the water for? What is the diamond for?What is the diamond for? Does this seem strange?Does this seem strange?

Value, Utility, and WealthValue, Utility, and Wealth

The Paradox of Value is the situation The Paradox of Value is the situation where some necessities, such as where some necessities, such as water, have little monetary value, water, have little monetary value, whereas some non-necessities, such whereas some non-necessities, such as diamonds have a much higher as diamonds have a much higher monetary value.monetary value.

Value isn’t calculated by scarcity Value isn’t calculated by scarcity alone, although it is part of it.alone, although it is part of it.

Value, Wealth, and UtilityValue, Wealth, and Utility For something to have value, it must For something to have value, it must

also have utility, or the capacity to also have utility, or the capacity to be useful and provide satisfaction.be useful and provide satisfaction.

Definition: utility is how much use or Definition: utility is how much use or satisfaction someone gets out of satisfaction someone gets out of something.something.

It varies from person to person.It varies from person to person.

Value, Wealth, and UtilityValue, Wealth, and Utility

For something to have value, For something to have value, economists have found that it must economists have found that it must be scarce AND have utility.be scarce AND have utility.

Utility Maximization is getting the Utility Maximization is getting the most usefulness from a scarce most usefulness from a scarce resource.resource.

Value, Wealth, and UtilityValue, Wealth, and Utility

Wealth is the accumulation of those Wealth is the accumulation of those products that are tangible, scarce, products that are tangible, scarce, useful, and transferable from one useful, and transferable from one person to another.person to another.

Productivity and Economic Productivity and Economic GrowthGrowth

Economic growth occurs when a Economic growth occurs when a nation’s total output of goods and nation’s total output of goods and services increases over time.services increases over time.

Productivity, or the measure of the Productivity, or the measure of the amount of output produced by a amount of output produced by a given amount of inputs in a specific given amount of inputs in a specific period of time, is one of the most period of time, is one of the most important factors responsible for important factors responsible for economic growth.economic growth.

Productivity and Economic Productivity and Economic GrowthGrowth

Productivity goes up whenever more Productivity goes up whenever more output can be produced with the output can be produced with the same amount of inputs.same amount of inputs.

Division of labor is an idea first Division of labor is an idea first developed by Adam Smith in developed by Adam Smith in The The Wealth of NationsWealth of Nations (one of the first (one of the first economic books published in 1776).economic books published in 1776).

Productivity and Economic Productivity and Economic GrowthGrowth

Division of labor takes place when Division of labor takes place when work is arranged so that individual work is arranged so that individual workers do fewer tasks than before. workers do fewer tasks than before. Because the worker is doing less, Because the worker is doing less, they should become really good at they should become really good at what they do, and should, in turn, be what they do, and should, in turn, be able to do more in the same amount able to do more in the same amount of time (thus increasing of time (thus increasing productivity).productivity).

Productivity and Economic Productivity and Economic GrowthGrowth

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

Specialization and division of labor Specialization and division of labor are huge determinants in are huge determinants in productivity.productivity.

Productivity and Economic Productivity and Economic GrowthGrowth

Another contribution to productivity Another contribution to productivity comes from investments in human comes from investments in human capital, or the sum of the skills, capital, or the sum of the skills, abilities, health, and motivation of abilities, health, and motivation of people.people.