The Science of Economics

Microeconomics is the branch of economics that examines the choices of individuals concerning one product, one firm, or one industry.

Macroeconomics is the branch of economics that examines the behavior of the whole economy at once.

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Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.

The fundamental economic

problem facing all societies is Scarcity. Scarcity is the condition that

results for society not having enough resources to produce all the things people would like to have.

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A need is a basic requirement for survival and includes food, water and shelter.

A want is a way of expressing a need. Since a variety of wants can satisfy a need, wants tend to be broader than needs.

There is no such thing as a free lunch

How did this product get to the table in your house? List from the farmer to the grocer.

How many people touched this product?

http://www.youtube.com/watch?v=l-bflQuRLbU

Seemingly

Unlimited Wants

Limited Resources

SCARCITY

CHOICES

WHAT

To Produce

HOW

To Produce

FOR WHOM

To Produce

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You are the leaders of a third world country. You have a major problem: You do not have enough resources to feed and take care of the healthcare needs of your people. You must make decisions. Who do you feed or provide healthcare for?

Food Healthcare

1 - 10 years old 30% ? ?

11 – 60 years old 50% ? ?

61 – 85 years old 20% ? ?

You cannot exceed 100% You have a population of 1 million.

What to Produce ◦ Should they produce

military goods or food?

How to Produce ◦ Should they use

equipment and few people or use more people and less equipment?

For Whom to Produce ◦ How are the things

produced allocated?

All the processes involved in making wealth and bringing it from its place

of origin to the ultimate consumer.

Land Labor

Capital Entrepreneurship

(Management )

The entire material universe exclusive of people and their products

◦ Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land.

This concept thus includes not merely the dry surface of the earth, but all natural materials, forces and opportunities.

The trees in a virgin forest are land; in a cultivated forest they are wealth.

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All human exertion in the production of wealth

◦ All who participate in production by their mental and/or physical effort are laborers in the economic sense. This would include their efforts, abilities and skills.

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Wealth used to produce more wealth, or wealth in the course of exchange. ◦ A machine is wealth. If used to produce shoes

or other wealth, the machine is wealth that is capital (capital good). So also would a merchant’s stock (inventory) of goods in trade be capital because the final exchange is not been completed.

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Some economist include workers that have a special status because they are the innovators responsible for much of the change in our economy.

An entrepreneur is a risk-taker in search of profits.

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When all factors of production (land, labor, capital and entrepreneurship) are present, production, or the process of creating goods and services, can take place.

Note!! Everything we produce require these factors.

GDP –The total production of goods and services created within a country during a calendar year.

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Use the pictures below. What are the factors depicted?

Description ◦ Describing Economic Activity

Analysis ◦ Trying to determine “why”

something happens

Explanation ◦ Using Economic theory to

explain how things work

Prediction ◦ Using Economic events to

predict future economic activity

Basic Economic Concepts ◦ Goods – items that are economically useful or

satisfies an economic want

Consumer Goods – used by individuals

Capital Good – Goods used to produce more goods

◦ Services – work that is preformed for someone

◦ Consumer(s) – a person who uses a good or service

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Why are some necessities, such as water, have little monetary value while some non-necessities like diamonds, have a much higher value? ◦ Economist know that scarcity is required for

value.

◦ Value – worth that can be expressed in dollars

◦ Utility – the capacity to be useful and provide satisfaction

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

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A market is a mechanism that allows buyers and sellers to exchange a certain economic product. ◦ Factor Markets – are where productive resources are

bought and sold.

◦ Product Markets – are where producers sell their goods and services to consumers.

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Business Income

Consumer Spending

Product Markets

Factor Markets

Businesses Individuals

Payments for

Resources Income from Resources

Goods & Services

Buy Productive Resources

Circular Flow

Sell

Land, Labor Capital

Entrepreneurs

$

Supply

Purchases

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◦ Economic growth occurs when a

nation’s total output of goods and services increases over time.

◦ Economic productivity is a measure of the amount of output produced by a given amount of inputs during a specific period of time.

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Human Capital is the sum of the skills, abilities, health, and motivation of people. ◦ Government & Businesses can invest in

human capital (labor) by providing education (training) and health care to improve the skill and motivation of its workers.

Division of Labor takes place when work is arranged so that individual workers do fewer tasks than before.

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

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Economic Interdependence means that we rely on others, and others rely on us, to provide the goods and services that we consume.

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Take a simple wooden pencil and list the people that contributed to this item from its conception to my classroom.

Economic Interdependence

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

Led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Getting cargo from point to point, on time and in good condition

Back in the 1700s, the British government paid sea captains to take felons to Australia. About a third of the males on one particularly horrific voyage died. The rest arrived beaten, starved, and sick. I mean, they were hobbling off, those who were lucky enough to survive.

This was a scandal back in England, so the government tried to fix it with all different kinds of rules. Force the captains to bring a doctor along. Require them to bring lemons to prevent scurvy. Have inspections. Raise captains’ salaries.

The clergy begged the captains, for humanity’s sake, to take better care of the prisoners. No dice.

None of it worked.

Instead of paying for each prisoner that walked on the ship in Great Britain, the government should only pay for each prisoner that walked off the ship in Australia. And in fact, this was the suggestion which in 1793 was adopted and implemented. And immediately, the survival rate shot up to 99%.

Before the captains were paid to keep the convicts alive, they had different incentives — "like keep food from the prisoners, and then sell the food in Australia,“ they were already paid for the prisoners.

The answer is to reward the captains for keeping the passengers alive, and — voila! — they arrive alive.

Allocation

What need will be satisfied?

What resource will be used?

How much of the resource will be used?

Trade-Offs

Choosing among alternatives to satisfy allocation

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Every decision we make has its trade-offs or alternative choices. When you make an economic decision (a choice) opportunity cost are incurred.

Opportunity Cost ◦ The value of what you give up

when you make a choice.

Opportunity Benefit ◦ The value of what you gain by

making that choice.

The various combination of goods and services that an economy can choose to produce.

When an economy is operating at full capacity it is operating at maximum production. This is also known as the production possibilities frontier.

Production possibilities help us understand the concept of opportunity cost.

Butter

Guns

A

D

E

B

70

60

50

40

30

20

10

0

0 100 200 300 400 500 600 700

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If you are operating at maximum production, the only way to produce something new you must give up the production of another item.

If you have economic growth you can push the curve outward allowing for more total production. (Population Growth, Improving Technology, or growth in the Capital Stock which are investments in factories, etc.)

If you have idle resources (operating inside the curve) you will be able to produce more of both without giving up production.

Cost benefit analysis is a way to look at the benefit received from an economic action.

A free enterprise economy is an economic system where business and consumers answer the majority of WHAT, HOW and WHOM questions.

Standard of Living is the quality of life based on the possessions of the necessities and luxuries that make life easier.

Citizenship – The study of economics helps us become better decision makers.

The World – Economics provide a framework for analysis – a structure that helps explain how things are organized.