Unit 1 Intro to Economics What is economics

Unit 1 - Intro to Economics What is economics?

Intro to Economics ü A. Economics- the study of human efforts to satisfy unlimited wants with limited resources. ü - Economics is a social science that deals with people and how they deal ü with scarcity. ü B. Scarcity- not having enough resources to produce everything people want. ü 1. Scarcity is the most fundamental economic problem. ü 2. There is no such thing as a free lunchü everything involves some time, money, or resources.

Three basic economic questions ü 1. What to Produce- food vs. shelter vs. defense ü 2. How to Produce- factories vs. hand made ü 3. For whom to Produce- who is your target audience? how did you decide?

Factors of production ü 1. Land - Natural resources including forests, minerals, water, etc. ü 2. Capital – tools and equipment used to make goods and services. ü Financial capital- money used to buy tools and equipment for production. ü 3. Labor- people to do the work. Can change in time (growth, immigration, war) ü Entrepreneurs- driving force of the economy. Take risks to gain profit

Economic Systems ü 1. Traditional- economic activity based on habit or custom ü 2. Command- central authority decides how to answer the economic questions. ü 3. Free Market- people are free to act in their own self interest ü 4. Mixed- combination of any of the above. Most countries are mixed including ü the US.

Opportunity Cost ü 1. Trade off- alternatives - because you cannot have everything desired, you must prioritize what is most important to you. When you do this, you make sacrifices (ex. going on a Spring Break trip to Europe in high school or saving money for college / relaxing during the break – if you go on the trip, you trade off saving money and relaxing) ü 2. Opportunity Cost- The cost of your next best alternative - including money, time, and resources - when a decision is made. (ex. going to a party instead of studying for one hour – opportunity cost is one hour of studying)

Needs and Wants ü 1. Need- required for survival ex. oxygen ü 2. Want- something desired ex. an expensive car

Goods, Services, and Consumers ü 1. Goods- tangible products, things you can see or touch ü a. consumer goods - final use is by the consumer ü b. capital goods - used to produce other goods and services ü c. durable goods - good that lasts more than 3 years under normal use

Goods, Services, and Consumers ü 2. Services- work performed for someone else. ü Service industry is fastest growing part of economy ü 3. Consumers- people to use the goods and services a. Consumption- process of using goods and services b. Conspicuous consumption - use of a good or services to impress others

Utility and Value ü 1. Utility- the capacity to be useful to someone. Should vary from person to person ü 2. Value- scarcity and utility together create value ü 3. Paradox of Value - why are some things we need very cheap (water) and other things we don’t need very expensive (diamonds)?

Capitalism and Free Enterprise 1. Capitalism -- system where private citizens own the factors of production. 2. Free Enterprise 1. Economic Freedom -Everyone has choices. 2. Voluntary Exchange -Free to buy and sell from/to anyone. 3. Private Property -- Control your possessions as you wish. 4. Profit Motive -- improve materials and well being by taking risk.

Making Economic Decisions üThe most desirable of the options you pass up when you make a decision is called the Opportunity Cost

Making Economic Decisions üWhat other option do you have other than using 3 hours for one task? üYou could split your time among multiple activities! üThinking at the Margin – decision involving adding one unit and subtracting one unit, rather than all or nothing approach

Making Economic Decisions Options Benefit Opportunity Cost 0 hours studying, 3 F on Test hours sleeping None 1 hours studying, 2 C on Test hours sleeping 1 hour of sleep 2 hours studying, 1 B on Test hour sleeping 2 hours of sleep 3 hours studying 3 hours of sleep B+ on Test

Making Economic Decisions üThere is a point at which you are paying the same increase in cost, but seeing lower benefits (ex. B to B+ on test = one extra study hour) üYou must make the decision as to whether the cost is worth the benefit üThis same process is used by businesses and consumers to make decisions: cost-benefit analysis