Basic Economics

Dr Ed Wright

What is Economics?

• “A science that deals with the allocation, or use, of scarce resources for the purpose of fulfilling society’s needs and wants.” – Addison-Wesley

Scarcity• A situation in which the amount of something

actually available would not be sufficient to satisfy the desire for it, if it were provided free of charge.

Other Vocabulary:

• Need• Want• Economics• Goods• Services• Shortage• Factors of Production

• Land• Labor• Capital• Physical Capital• Human Capital

How is Economics used?

• Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics. • These theories are then applied to fix problems or meet economic goals. This is called policy economics Positive vs. Normative• Positive Statements - Based on facts. Avoids value • Normative Statements - Includes value judgments

5 Key Economic Assumptions1. Society’s wants are unlimited, but ALL resources are limited (scarcity).

2. Due to scarcity, choices must be made. Every choice has a cost (a trade-off).3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.”

4. Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice.

5. Real-life situations can be explained and analyzed through simplified models and graphs.

Micro vs. MacroMICROeconomics

• Study of small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc.)

MACROeconomics • Study of the large economy as a whole or

in• its basic subdivisions (National Economic

Growth, Government Spending, Inflation, Unemployment, etc.)

Factors of Production• There are 4 key factors that must

all be used to produce anything– Natural Resources (also referred to

as “land”)– Labor – effort of a person for which

they are paid– Capital – human-made resources

used to create other goods Physical Capital – Also called Capital Goods, represents objects that are used to produce other goods & Human Capital – knowledge or skills workers get from education and experience

– Entrepreneurship – person who takes a risk in combining the other 3 factors to create a new good

Making Economic Decisions

• Every decision we make involves trade-offs – alternatives that we must give up when we make a choice– Example – “I could stay up for 3 hours playing games, study, or sleep.”

• The most desirable of the options you pass up is called the Opportunity Cost

Rank: sleep, studying, and playing video games 1st, 2nd, and 3rd on a list for what you value the most1st Place is what you would choose to do2nd Place is your opportunity cost (you give it up to do option 1

Cost/benefitOptions

 Benefit

 Opportunity Cost

 0 hours studying, 3 hours sleeping

 

F on Test

None

1 hours studying, 2 hours sleeping

 

C on Test

1 hour of sleep

2 hours studying, 1 hour sleeping

 

B on Test

2 hours of sleep

3 hours studying 

B+ on Test

3 hours of sleep

Implications

• There is a point at which you are paying the same increase in cost, but seeing lower benefits

• You must make the decision as to whether the cost is worth it

• This same process is used by businesses and consumers to make decisions

Production Possibilities

• Production Possibilities Graph – shows alternatives to what an economy can produce– The outer red line shows the maximum possible output with any given

combination– This is the Production Possibilities Frontier (or Curve)

• To move from one point to another, the economy must make trade-offs

• Any point along the line shows the economy operating at maximum efficiency

• Any point below the line is underutilization – they are not getting all that they could

• Any point above the line is presently impossible, until new resources are available

Making sense of the curve:

• Why does the graph curve instead of making a straight line?– Law of Increasing Costs – as production increases for one item,

more and more resources are necessary to increase production of the second item! The OPPORTUNITY COST increases…

• Every resource is best suited for certain types of goods– Farmland and cows make butter– Metals and factories make guns and many times you hear about

butter vs. guns due to military spending on weaponry using resources …

– To convert butter production to guns, you must sell the cows and build new factories on the land

Practical applications

SWOT Analysis• A SWOT analysis (alternatively SWOT matrix) is a structured planning

method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a business venture. A SWOT analysis can be carried out for a product, place, industry or person.

• It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. The technique is credited to Albert Humphrey, who led a convention at the Stanford Research Institute (now SRI International) in the 1960s and 1970s using data from Fortune 500 companies.[1][2] The degree to which the internal environment of the firm matches with the external environment is expressed by the concept of strategic fit

Application of this information

Tasks:1.i Write out a brief idea for a new piece of technology. (No matter how stupid!) You should outline what it is, your potential market and why it is a good idea.

1.ii Do a SWOT analysis of you idea and refine it.

1.iii Swap it with someone else and do a SWOT of theirs.

2 Do this from last week…

3 Make sure you are up to date with the coursework in for next Tuesday.

4 Start this: Write a short essay on ‘The technological and Cultural Factors that made the Snapshot Camera a successful invention’. 400-600 words There should be some primary research included to support arguments and the essay should be delivered to academic standard including full Harvard referencing. This task contributes 20% for the total mark for this module.