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Transcript of Economic Way of Thinking. Scarcity The condition that results from society not having enough...
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Economic Way of Thinking
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Scarcity
The condition that results from society not having enough resources to
produce all the things people would like to have.
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Scarcity Qualifications
1. Limited in quantity
2. Be desirable
3. Have more than one valuable use
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Everything has a cost!
Free Puppies!
No such thing as a Free Lunch!
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People choose for good reasons!
Cost and Benefits
Different Values = Different Choices
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Incentive Matters
Rent control in New York
Supply and Demand
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People create economic systems to influence choices and
incentives
Market vs Command Economies
As rules change incentives and behavior change
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People gain from voluntary trade.
Makes them better off
No benefit = no trade
Economics is about trade!
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Economic thinking is marginal thinking.
Marginal choices involve the effects of additions and
subtractions
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The value of a good or service is affected by people’s choices.
Value is determined by the preferences of buyers and sellers
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Economic actions create secondary effects.
Rent controls make apartments more affordable to some.
Less profitable to build and maintain. (Friends)
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The test of a theory is its ability to predict correctly.
It the theory correctly predicts the consequences of actions, it is a good
theory!Proof is in the pudding!
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So what is Economics?
Economics is the study of how people satisfy wants with scarce
resources
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Mom I NEED food! Mom I WANT Pizza!
• NEED: basic requirement for survival – Food, clothing, shelter
• WANT: way of expressing a need
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There Is No Such Thing As FREE Lunch!
Buy one, Get one Free
Who pays?
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Decisions on how to use our limited resources?
• WHAT to produce?
• HOW to produce?
• FOR WHOM to produce?
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WHAT to produce?
• Military Equipment v. other goods (food clothing housing)
• Should its limited resources be used for _________?
• Cannot Please everyone….MUST make a decision on WHAT to produce!
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HOW to produce?
• Mass production– Equipment v. workers– Low v. high production cost– Less expensive = available to the masses
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FOR WHOM to Produce?
• Must be allocated to someone
• Not enough? – A choice must be made – Who will receive it?
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Three questions MUST be answered b/c of limited resources
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Unlimited
Wants Limited Resources
Scarcity
Choices
WHAT to produce
HOW to produce
FOR WHOM to produce
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Factors of Production
LandCapital Labor
Entrepreneurs
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Land
• “Gifts of nature” (natural resources)
• Fixed or limited in supply
• Good farmland, sandy beaches, oil and minerals
• Scarcity increases as population grows
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Capital
• Tools, equipment, machinery, and factories used in production of goods and services (capital goods)
• Financial Capital: money used to buy capital goods
• Computers in school: used to produce the service of education
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Labor
• People with effort, abilities, and skills– Exclude the group called entrepreneurs – Vary in size– Why would the labor force vary in size?
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Entrepreneurs
• Innovators responsible for change in our economy
• Risk-taker – Profits– New with existing resources
• Start new businesses/ new products
• Initiative that combines resources (land, labor, capital)
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Production
• Factors of production are present = PRODUCTION
• Creating of goods and services can take place– Schools:
• Capital goods?• Labor?• Land? • Entrepreneurs?
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Gross Domestic Product (GDP)
• It is the most important measure of the overall economy.
• It is the overall dollar amount of all goods and services produced within the United States borders in a year.
• American goods made in other countries are NOT counted (ford plants in Mexico)
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GDP
• Nissan plants in Tennessee DO count toward GDP
• Secondhand sales do NOT count toward GDP – Used Cars, Garage Sales, Thrift Stores because they have already been counted.
• Illegal activities such as drug sales, illegal gambling do NOT count.
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Scope of Economics
• Description – GDP: dollar value of all final goods and services produced within
a countries boarders – Need to know what the World around looks like
• Analysis – Why are prices of some items high while others are low?– Why things work and how things happen
• Explanation – Communication of knowledge to others
• Prediction – Rise and fall of Income– Make best decision: what is, what tends to be, and what may
happen?
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Basic Economic Concepts
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Goods, Services, and Consumers
• Economic Products: – Goods and services that are useful, scarce,
and transferable to others – Cannot get enough to satisfy ones wants and
needs – Command Price
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Goods
• Item that is economically useful or satifies an economic want
• Consumer Goods:– Final use by individuals
• Capital Goods:– Manufactured goods used to produce other goods
and services
• Durable Goods:– Any good last three or more years when used on a
regular basis
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Services
Work that is preformed for someone
Examples??
Intangible: cannot be touched
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Consumers
Person who uses goods and services to satisfy wants and
needs
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Value, Utility, and Wealth
Value refers to a worth that can be expressed in dollars and cents
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Paradox of Value
• Contradiction between necessities and value
• Water v. Diamonds
• Scarcity is required for value – Is it enough?
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Utility
• The capacity to be useful and provide satisfaction
• Not fixed or measureable
• Vary from person to person
• i.e.: One person may enjoy a rock/R&B concert, another may not
• Value = Scarce + Utility
• Water v. Diamonds
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Wealth
• Accumulation of those products that are tangible, scarce, useful, and transferable
• Nations wealth: includes natural resources. Factories, houses, etc
• Services are not counted as wealth (intangible)
• The Wealth of a Nation, 1776 by Adam Smith (read page 18 profiles in economics)
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The Circular Flow of Economics
Market
Factor Markets
Product Markets
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• Markets: location or other mechanism that allows buyers and sellers to exchange a certain economic product
• Factor Markets: Where productive resources are bought and sold. (sell your labor for wages)
• Product Markets: producers sell their goods and services to consumers ( you use to money you made to buy products)
The Circular Flow of Economics
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Productivity of Economic Growth
• Economic Growth:– nations OUTPUT of goods and services
increases over time – Circular flow chart:
• Means more factors of production (goods/services) flowing in once direction
• Productivity:– Measure of the amount of output produced by
a given amount of inputs in a time period• The most efficient capital goods/most fertile land
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Division of Labor
• Individual workers do fewer task
• Become proficient in a task v. less proficient in hundreds of task
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Specialization
• FOP can perform tasks that they can do more efficiently than others – Industry robots– Regional specialization: GA =
Peaches/Peanuts
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Henry Ford
• Assembly line– Cut time necessary to make a car – Cut the price of the car
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Investing and Human Capital
• Human Capital: sum of the skills, abilities, health, and motivation of people – Gov’t can invest: Education and health care– Businesses: training/programs to improve
motivation – Individuals: invest in their education
• Invest: Human+Physical Capital leads to an increase in production = ECONOMIC Growth
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Economic interdependence
• We rely and others and others rely on us to provide goods and services that we consume– Cars are built in the US but parts may be made in
another country
• Labor disputes:– Basketball affects people who park cars, sell tickets,
serve food at the games, see apparel, etc– Drought/hurricane/flooding in one country can effect
price of goods in another
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Bib.
• Economics: Principles and Practices
• Chapter 1
• Gary E. Clayton, Ph.D.
• McGraw, Glencoe
• 2005