Basic Problems in Economics

Economics The study of how individuals, families, businesses, and societies use limited resources to fulfill their unlimited wants.

Wants vs. Needs

A need is anything that you need to survive- Basic survival- Seven things

A want- anything else- a non-necessity

People have unlimited wants but limited resources

People have to make choices

Choices

Choices- how are you going to divide your resources?

Businesses do the same thing- what to produce, how to produce, for whom to produce

People must make choices because of the problem of scarcity

Problem of Scarcity

People have to make choices because everything that exist is scarce

Scarcity is the most basic problem in economics

Scarcity is that something that you need or want is not readily available

Different from a shortage- you can get more just out temporarily

Scarcity always exist

Factors of Production   We use the factors of production to make products

or services Factors of production are how we are going to use

these resources to make a product or service– 1. Land- natural resources– 2. Labor- workers- human resources- make

goods- touch- services are actions– 3. Capital- when you use goods and services to

create another good or service Combined LLC- more valuable- Diamonds Capital also increases productivity- produce

more things– 4. Entrepreneurship- start a new business a

person is called an entrepreneur– 5. Technology- new factor- changes every

thing

Trade offs Trade Offs- sacrificing one good or service to

purchase or produce another – If you buy a DVD, you are exchanging your money

for the right to own the DVD Opportunity cost- value of the next best

alternative given up for the alternative that was chosen

Time is a scarce resource and when you give it, you are making a trade-off; and when you study, you are giving up other certain things (ex. Going to the mall…talking to friends)

Any time that you make a tradeoff, you lose…you lose the next best alternative– Ex. National level Congress votes $220 Billion for

new roads, or it could have been used for higher education

Production Possibilities Curve

Production Possibilities Curve- graph showing the maximum combinations of goods and services that can be produced from a fixed amount of resources in a given amount of time.

Used when you produce more than one type of product.

Involves trade-offs The Classic example:

– Trade off between military defense and civilian goods (guns and butter)

Production Possibilities Curve

What is the best balance between military spending and domestic programs? What kind of situations might arise that would cause you to change your answer?

Continued on next slide.

Economic Models Microeconomics- small- households Macroeconomics- large- The US Economy- activity that affects

production, distribution, and the use of goods and services

Theories are called economic models– They show visual representation of

consumers, businesses, and other economic behavior

– 1.      Create a model– 2. Hypothesis– 3. Test – 4. Apply

Figure 1.10 Economic Models

Graph A is an example of a model, and Graph B is a test of that model.

Economic Models

Schools of Economic Thought

Different views- Where you live affects the outcomes

Values will affect the outcome Not in terms of good or bad

– short term and long term outcomes