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The Science ofEconomics
Unit 1
Macroeconomics is thebranch of economicsthat examines thebehavior of the whole
Microeconomics is thebranch of economicsthat examines thechoices of individualsconcerning one product,one firm, or oneindustry.
economy at once.
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Economics is the study of how people try tosatisfy what appears to be seeminglyunlimited and competing wants through thecareful use of relatively scarce resources.
The fundamental economic
problem facing all societies isScarcity.
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Scarcity is the condition that results for society not having enough resources to produce all the things people would like to have.
A need is a basicrequirement forsurvival and includesfood, water andshelter.
A want is a way ofexpressing a need.Since a variety of wantscan satisfy a need,wants tend to bebroader than needs.
There is no such thing as afree lunch
How many people touched this product?
How did this productget to the table inyour house?
List from the farmerto the grocer.
http://www.youtube.com/watch?v=l-bflQuRLbU
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WHAT
To Produce
HOW
To Produce
FOR WHOM
To Produce
CHOICES
SCARCITY
Seemingly
Unlimited
Wants
Limited
Resources
You are the leaders of a third world country. You
have a major problem: You do not have enoughresources to feed and take care of the healthcareneeds of your people. You must make decisions.Who do
1060
85
you feed or provide healthcare
Food
?
?
?
for?
Healthcare
?
?
?
1
11
61
-
–
–
years
years
years
old
old
old
30%
50%
20%
You cannot exceed1 million.
100% You have a population of
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
LaborCapital
Entrepreneurship(Management )
The entire material universe exclusive ofpeople and their products
◦
This concept thus includes not merely the dry surface ofthe earth, but all natural materials, forces andopportunities.
The trees in a virgin forest are land; in a cultivated
forest
they are wealth.
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◦Everything physical (other than human beings) which is not the result of human effort is within the economic definition of land.
All human exertion in the productionof wealth
◦ All who participate in production bytheir mental and/or physical effort arelaborers in the economic sense. Thiswouldskills.
include their efforts, abilities and
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Wealth used to produce more wealth, orwealth in the course of exchange.◦ A machine is wealth. If used to produce shoes
or other wealth, the machine is wealth that iscapital (capital good). So also would amerchant’s stock (inventory) of goods in tradebe capital because the final exchange is notbeen completed.
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Some economist include workers thathave a special status because they arethe innovators responsible for much ofthe change in our economy.
An entrepreneur is a risk-taker in searchof profits.
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When all factors of production(land, labor, capital andentrepreneurship) are present,production, or the process ofcreating goods and services, cantake place.
Note!! Everything we produce
require these factors.
GDP –The total production ofgoods and services created withina country during a calendar year.
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Use the pictures below.depicted?
What are the factors
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 somenon-necessities like diamonds, have amuch 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 arefromtangible, scarce, useful, and transferable
one person to another.
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A market is a mechanism that allows buyersand sellers to exchange a certain economicproduct.◦ Factor Markets – are where productive resources
bought and sold.are
◦ Product Markets – are where producersconsumers.
sell theirgoods and services to
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Circular FlowProduct Markets$
Supply ConsumerSpending
BusinessIncome
Purchases
Goods &Services
Businesses IndividualsSell
Land, LaborCapital
Entrepreneurs
BuyProducti
veResourcesPayments for
ResourcesIncome fromResources
Factor Markets
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◦ Economic growth occurs when anation’s total output of goods andservices 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 theskills, abilities, health, andmotivation 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 isarranged so that individual workers dofewer tasks than before.
Specialization takes place when factors ofdoproduction perform tasks that they can
others.relatively more efficiently than
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Economic Interdependencemeans that we rely onothers, and others rely onus, to provide the goods
and servicesconsume.
that we
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Take a simple wooden pencil and list thepeople that contributed to this item from itsconception to my classroom.
Economic Interdependence
It is not from the benevolence ofthe butcher, the brewer, or thebaker, that we expect our dinner,but from their regard to their owninterest.
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 promoteit.
Getting cargo from point to point, on timeand in good condition
Back in the 1700s, the British government paidsea captains to take felons to Australia. Abouta third of the males on one particularly horrificvoyage died. The rest arrived beaten, starved,and sick. I mean, they were hobbling off, thosewho were lucky enough to survive.
This was a scandal back in England, so thegovernment tried to fix it with all different kindsof rules. Force the captains to bring a doctoralong. Require them to bring lemons to prevent
scurvy. Have inspections.
The clergy begged the
captains, for
humanity’s
sake, to take better
care
of the prisoners.No dice.
Raise captains’ salaries.
None of it worked.
Instead of paying for
each
prisoner thatwalked on the ship in Great Britain, thegovernment should only pay for eachprisoner that walked off the ship in Australia.And in fact, this was the suggestion which in1793 was adopted and implemented. Andimmediately, the survival rate shot up to 99%.
Before the captains were paid to keep theconvicts alive, they had different incentives —"like keep food from the prisoners, and thensell the food in Australia,“ they were alreadypaid for the prisoners.
The answer is to reward the captains forkeeping 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
used?
be
Trade-Offs Choosing among alternatives to satisfy
allocation
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Every decision we make has its trade-offs oralternative choices. When you make aneconomic decision (a choice) opportunityare incurred.
Opportunity Cost
cost
◦ The value of what you give up
when you make a choice.
Opportunity BenefitThe value of what you gain by
making that choice.
◦
The various combination of goods andservices that an economy can choose toproduce.
When an economy is operating at full capacity
it is operating at maximum production. Thisis also known as the production possibilitiesfrontier.
Production possibilities
help
us understand the conceptof opportunity cost.
70D
60
50 A
40Guns B
30 E
20
C10
0 100 200 300 400 500 600 7000
Butter
If you are operating at maximum production, theonly way to produce something new you must giveup 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 thebenefit received from an economic action.
A free enterprise economy is an economicsystem where business and consumersanswer the majority of WHAT, HOW andWHOM questions.
Standard of Living is the quality of life basedon the possessions of the necessities andluxuries that make life easier.
Citizenship – The study of economics helpsus become better decision makers.
The World – Economics provide a
framework
for analysis – a structure that helps explain
how things are organized.