ECONOMICS NOTESECONOMICS NOTESCHAPTER 1CHAPTER 1

WHATWHAT

ISIS

ECONOMICS? ECONOMICS?

I. Economics DefinedI. Economics Defined

The study of the The study of the choices that people choices that people make to satisfy their make to satisfy their needs and wantsneeds and wants

MicroeconomicsMicroeconomics- -

The study of the choices The study of the choices made by a single made by a single economic actor economic actor

Ex: (households, companies, & Ex: (households, companies, & individual markets). It can be a individual markets). It can be a huge company, but is a single huge company, but is a single actor.actor.

MacroeconomicsMacroeconomics

The behavior of entire The behavior of entire economies. economies.

Example—Example—unemployment in U.S. unemployment in U.S.

II. Economic DecisionsII. Economic Decisions

A. Who makes decisions? A. Who makes decisions? ConsumersConsumers—the people —the people

who buy thingswho buy things ProducersProducers—the people —the people

who make things to who make things to satisfy the consumers’ satisfy the consumers’ needs and wantsneeds and wants

B. How do you make B. How do you make decisions?decisions?

1.1. Make choices based on needs Make choices based on needs and wantsand wants

2.2. Goods—Tangible: the physical Goods—Tangible: the physical objects that can be purchased objects that can be purchased (clothing, food, DVDs)(clothing, food, DVDs)

3.3. Services—Intangible: actions and Services—Intangible: actions and activities that are performed for activities that are performed for a fee (lawyers, teachers, taxi a fee (lawyers, teachers, taxi drivers)drivers)

III. Economic ResourcesIII. Economic Resources

A.A.ResourceResource—anything —anything that people use to that people use to make or obtain what make or obtain what they need or wantthey need or want

B. B. Factors of productionFactors of production——resources that can be used resources that can be used

to produce goods and to produce goods and services. There are 4:services. There are 4:

1. 1. Natural resourcesNatural resources—items provided —items provided by nature (farmland, fish, oil, coal) by nature (farmland, fish, oil, coal) They are only considered A Factor They are only considered A Factor of Production of Production IFIF it is scarce and it is scarce and payment is necessary (air is NOT) payment is necessary (air is NOT)

2. 2. Human ResourcesHuman Resources

Any human effort Any human effort exerted during exerted during production. production.

Can be physical or Can be physical or intellectual. (Assembly-intellectual. (Assembly-line workers, ministers, line workers, ministers, clerks)clerks)

3. 3. Capital ResourcesCapital Resources

The manufactured materials used to The manufactured materials used to create products. Includes create products. Includes Capital Capital goodsgoods are the manufactured are the manufactured resources that are used in making resources that are used in making finished products. Examples are finished products. Examples are buildings, structures, machinery, buildings, structures, machinery, tools, stress, factories, dams, tools, stress, factories, dams,

computers, hammerscomputers, hammers..

4. 4. EntrepreneurshipEntrepreneurship

the organizational ability and risk the organizational ability and risk taking involved in starting a new taking involved in starting a new business or making a new product. business or making a new product. An An entrepreneurentrepreneur is a person who is a person who attempts to start business. They attempts to start business. They are taking risks.are taking risks.

IV. ScarcityIV. Scarcity

****Most fundamental ****Most fundamental economics issue**** economics issue****

{All resources are {All resources are limited; People’s limited; People’s wants are unlimited}wants are unlimited}

I want…

ScarcityScarcity

1.1. A condition that results from the A condition that results from the combination of limited resources and combination of limited resources and unlimited wantsunlimited wants

2.2. Many factors contribute to scarcity. Many factors contribute to scarcity. (weather, war)(weather, war)

3.3. People decide to People decide to allocate allocate resources in resources in order to satisfy greatest number of order to satisfy greatest number of needs and wants.needs and wants.

V. Deciding how to allocate V. Deciding how to allocate you must ask:you must ask:

Three Basic Three Basic Questions:Questions:

1. What to produce?1. What to produce?

2. How to produce?2. How to produce?

3. For whom to 3. For whom to produce? produce?

VI. ProductivityVI. Productivity

The level of output that The level of output that results from a given results from a given level of inputlevel of input

Productivity con’tProductivity con’t

A. Example: Sleep Time hires 100 A. Example: Sleep Time hires 100 employees to build 1000 alarm employees to build 1000 alarm clocks per week (1,000 ÷ 100 = clocks per week (1,000 ÷ 100 = 10) 10)

B. Suppose they want to improve B. Suppose they want to improve efficiency efficiency (use smallest amount (use smallest amount of resources to produce greatest of resources to produce greatest amount of output). amount of output).

To improve efficiency:To improve efficiency:1.1.Division of laborDivision of labor—assign —assign

small number of tasks to each small number of tasks to each worker. Focus on one activity worker. Focus on one activity is called is called specializationspecialization. This . This allows each worker to work allows each worker to work faster and produce more faster and produce more clocksclocks

2.2. They may decide to create They may decide to create shortcuts to increase shortcuts to increase efficiency.efficiency.

3.3.Use of Use of mechanizationmechanization.. (Replace people)(Replace people)

VII. ChoicesVII. Choices

1.1.Trade off—Trade off—The The sacrifice sacrifice made when choosing an made when choosing an alternative use for available alternative use for available resource. resource.

2.2.Opportunity Cost—Opportunity Cost—the value the value of the 2nd choice that you of the 2nd choice that you gave up when you chose the gave up when you chose the 1st 1st

VIII. Production Possibility VIII. Production Possibility CurveCurve

A graph that shows trade-A graph that shows trade-offs and opportunity costs. offs and opportunity costs.

It shows all of the possible It shows all of the possible combinations of two goods combinations of two goods that can be produced within that can be produced within a certain timea certain time

Production Possibility FrontierProduction Possibility Frontier

Tool: production possibility frontier; 1

0

6

2 Good X

Good Y

A

Suppose it is possible for Holland to produce 2 units of good X and 6 units of good Y

If we plot good X horizontally and good Y vertically this is represented by point A.

Alternatively, suppose that Holland, if it wanted to, could produce 8 units of good X and 2 units of good Y

This is represented by point B

Charles van Marrewijk

2

8

B

The production possibility curve.

A

Good X

Good Y

0

B

Perhaps, Holland cannot only produce combinations A and B but many other different combinations also

Here we have drawn a few

We call the line connecting all possible different combinations

Charles van Marrewijk

Tool: production possibility frontier; 2

Good X

Good Y

0

Note that the production possibility curve only connects

efficient production combinations.

(2 X and 2 Y) can be produced by Holland, but it

Point C

could produce more of Y (at A) or

more of X (at B) or more of both

goods (the red line

between A and B)

6

B

Charles van Marrewijk

Tool: production possibility frontier; 3

A

C

Good X

Good Y

0

Thus, the production possibility curve represents efficient

output combinations.

final output (including non-optimal combinations)

All possible combinations of

is called the production possibility set

Charles van Marrewijk

Tool: production possibility frontier; 4

Activity:Activity:

On graph paper label these points:On graph paper label these points:

X=Luxury Cars (in millions) X=Luxury Cars (in millions) 55 4 4 3 3 1.5 1.5 0 0

______________________________________________

Y=Economy Cars Y=Economy Cars 00 2.8 2.8 4.5 4.5 6 6

77 Draw the curveDraw the curve

PPFPPF

1.1. Combinations that lie outside (above) the Combinations that lie outside (above) the curve represent production impossibilities.curve represent production impossibilities.

2.2. Each combination shows opportunity costs—Each combination shows opportunity costs—more of one good means making less of more of one good means making less of another.another.

3.3. When new technology or new resources When new technology or new resources occur the entire curve should move to the occur the entire curve should move to the right. Called “shift to the right” See Tran. # right. Called “shift to the right” See Tran. # 33

4.4. Combinations that fall inside (below) the Combinations that fall inside (below) the

curve show inefficient use of existingcurve show inefficient use of existing resources.resources.

IX. Exchange—3 formsIX. Exchange—3 forms

1.1. Barter—Barter—exchange one good for exchange one good for anotheranother

2.2. MoneyMoney- a standardized means - a standardized means of exchangeof exchange

3.3. CreditCredit—items can be used —items can be used before completing payment for before completing payment for the merchandise.the merchandise.

A.Money—a standardized means of exchange.

ValueValue

The worth of a good or The worth of a good or service for exchange. Also service for exchange. Also look at look at utility utility (usefulness (usefulness to a person).to a person).

Self-sufficiencySelf-sufficiency

when people can fulfill when people can fulfill all needs without all needs without outside assistance.outside assistance.

InterdependenceInterdependence

reliance among economic reliance among economic actors (Ex: boom in actors (Ex: boom in building in GA may mean building in GA may mean more paint production in more paint production in North)North)

Most countries rely on Most countries rely on each other for productseach other for products

The EndThe End

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