Chapter 1 Basic Economic Concepts

I WON THE LOTTERY!I’ll give you anything you want other than money.

What do you want? Would your list ever end?

Why not?Scarcity!!!

What is Economics?

Economics is the study of _________.

• Economics is the science of scarcity.

• Scarcity means that we have unlimited wants but limited resources. * Fundamental ? *

• Since we are unable to have everything we desire, we must make choices on how we will use our resources.

choices

In economics we will study the choices of individuals, firms, and governments.

Textbook DefinitionEconomics- Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants.

(Study of how individuals and societies deal with ________)

Examples:

You must choose between buying jeans or buying shoes.Businesses must choose how many people to hireGovernments must choose how much to spend on welfare.

scarcity

Is There Such a Thing as a Free Lunch

3 Basic ?’s

What to Produce?

For Whom?

How to Produce?

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The 4 Factors of Production

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The Four Factors of Production

Entrepreneurship

Capital

Labor

Land

•Producing goods and services requires the use of resources -•ALL resources can be classified as one of the following four factors of production:

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Land = Natural Resources used to produce goods and services. (Water, Sun, Plants, Oil, Trees, Stone, Animals, etc.)

The Four Factors of Production

Labor = Any effort a person devotes to a task for which that person is paid. (manual laborers, lawyers, doctors, teachers, waiters, etc.)

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Capital: 1. Physical Capital- Human-Made resource used to create other goods

and services (tools, tractors, machinery, buildings, factories, etc.)2. Human Capital- Skills or Knowledge gained by a worker through

education and experience (college degrees, vocational training, etc.)

The Four Factors of Production

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• Entrepreneurship= Innovator who combine existing factors of production to create new goods or services.

• Examples - Henry Ford, Steve Jobs, Mark Zuckerberg, Inventors, Store Owners, etc.

The Four Factors of Production

Entrepreneurs:1. Take The Initiative2. Innovate3. Act as the Risk Bearers

So they can obtain _________.

Profit= Revenue - Costs

PROFIT

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The Four Factors of Production

You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.

The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Classify the Factors of Production in the following scenario:

The Four Factors of ProductionClassify the Factors of Production in the following scenario:

You decide to order a pizza to satisfy your wants. First, you picked up the telephone and gave your order to the owner that entered it into her computer. This information came up on the chief baker’s monitor in the kitchen and he assigned it to one of his cooks. The cook was busy mixing dough out of salt, flour, eggs, and milk.

The cook finished mixing dough, washed his hands in the sink, and prepared your pizza using tomato sauce, cheese, and sausage. He then placed the pizza in the oven. Within 10 minutes the pizza was cooked and placed in a cardboard box. The delivery person then grabbed your pizza, jumped in the company car, and delivered it to your door.

Trade-offs and Opportunity CostALL decisions involve trade-offs.

The most desirable alternative given up as a result of a decision is known as opportunity cost.

Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.

(Examples: going to the movies)

What are trade-offs of deciding to go to college? What is the opportunity cost of going to college?

GEICO assumes you understand opportunity cost. Why?

Economic Terminology

Utility =Marginal =

Satisfaction!Additional!

Allocate = Distribute!

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Services= actions or activities that one person performs for another (teaching, cleaning, cooking)

Goods= physical objects that satisfy needs and wants

Give examples…

•Consumer Goods- created for direct consumption (example: pizza)

•Capital Goods- created for indirect consumption (oven, blenders, knives, etc.)

•Goods used to make consumer goods

Goods vs. Services

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The Circular Flow Model

The Product Market-•The “place” where goods and services produced by businesses are sold to households.

The Resource (Factor) Market-•The “place” where resources (land, labor, capital, and ent.) are sold to businesses.

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17Product Market

Resource Market

Businesses IndividualsGoods and Services$$$ Revenue $$$ $$

$ Spen

ding $

$$Goods a

nd

Service

s

SUPPLYDEMAND

DEMANDSUPPLY

$$$ Costs

$$$

Resourc

es

$$$ Income $$$Resources

(Factors of

Production)