What is Economics?
The study of economics begins with the idea
that people cannot have everything that they
need or want.
The study of how people make choices –
utilizing limited resources – to satisfy their
__NEEDS____ and __WANTS__
Why must people make such choices?
The reason is _SCARCITY-LIMITED
People always have to make choices about
how to meet their needs and wants.
A _NEED_ is something we must have in
order to survive – food and water, clothing,
A _WANT___ is something we would __LIKE
TO HAVE__ but that isn’t necessary for our
survival – things like a car, that new CD, or a
Obviously, our needs and wants are
However, the resources at our disposal to
meet our needs and wants are _LIMITED_.
This combination of limited resources but
unlimited needs and wants is THE BASIC
PROBLEM OF ECONOMICS.
The Three Basic Questions
What to produce?
How to produce?
For whom to produce?
the problem of
What is the Goal of Economics??
Need: something people need that is necessary for survival (ex: air, food, shelter)
Want: an item we desire but that is not essential to survival
Economics: the study of how people seek to satisfy their needs and wants by making
Why do we have to make these choices???? SCARCITY!!!!
Goods: physical objects such as shoes and shirts
Services: actions or activities that one person performs for another (ex: haircuts,
tutoring, dental checkups, etc)
Scarcity: limited resources to meet unlimited wants
** All goods and services we produce are scarce!!!!!!
Shortage: NOT the same as scarcity. A shortage occurs when producers will not or
cannot offer goods or services at the current prices….can be temporary or long term.
(wars and droughts can create shortages)
** scarcity always exists because our needs and wants are always
greater than our resource supply. Goods and services are scarce
because they are all made from resources that are scarce.
Factors of Production
Goods: tangible products
Services: work that is performed for someone else
Factors of Production
Resources necessary to produce goods and services- natural resources, labor, capital, and entrepreneurs
All natural resources use to produce goods and services
Includes all material found in nature
i.e. land, water, coal, forest, dirt, etc.
human effort directed toward producing goods and services
both physical and mental efforts
any human made resource that is used to produce other goods and services
physical capital: (capital good) human made objects that create other goods and services…..machinery, buildings,
- save people time and money- Benefits of physical capital: extra time, more knowledge, more
- human capital: the knowledge and skills a worker gains through education and experience
- ambitious leaders who decide how to combine land, labor, and capital resources to create new goods
individuals who start new businesses, introduce new products, and improve management techniques
use factors of production to produce new products
Costs of Production
Scarcity forces people to make decisions about how they will use their resources!!!
**Economic decision making requires people to consider all the costs and benefits of a decision
What are trade-offs??? What is an opportunity cost???
- Costs or expenses that are the same no matter how many units of are good are produced
Ex: mortgage payments, rent
- Costs or expenses that change with the number of products produced
Ex: wages, raw materials, electricity bills, water bills
- These costs increase when production increases and decrease when production decreases
- Fixed Costs + Variable Costs= Total Costs
- The extra or additional cost of producing one additional unit of an output
Ex: 30 bike helmets= $1500, 31 bike helmets= $1550 marginal cost= $50
the extra revenue that results from selling one more unit of an output
- an economic decision making technique that tells us to choose an action or make a decision when the benefits are greater than the costs
Law of Diminishing Marginal Returns
- a company’s goal is to make as much profit as possible
- Profit: is money a company has made after costs have been deducted.
- Companies can increase profit by maximizing efficiency in production.
- Often, by adding more land, labor, or capital, companies can increase their profit.
-Law of Diminishing Marginal Returns: a
level of production in which the marginal
product of labor decreases as the number of
Other Terms to Know
- Capital Goods: raw materials that are used
to make goods and services
- Consumer Goods: goods bought in the
market. These goods are consumed and are
not used to produce more goods. **As the
cost of capital goods rises, the price of
producing consumer goods also rises.