What is Economics?

Chapter 1What is Economics?What is Economics?Economics is about how people choose to use scarce resources to satisfy their needs and wants i.e. achieve goals

Needs vs. WantsNeedsWantsSomething like air, food or shelter that is necessary for survival

An item we desire but that is not essential to survival

Needs vs. WantsAre these needs or wants?

Needs vs. WantsAre these needs or wants?

GoodsThe products created on Aquarius Island are goods. Goods are physical objects such as clothes or shoes.

ServicesServices are actions that one person performs for another

All Resources are ScarceAll resources, especially on Aquarius Island are scarce. Scarcity is limited resources to meet unlimited wants.

Scarcity vs. ShortageA shortage is a situation in which a good or service is unavailable. Sometimes a producer cannot or will not offer a good or service.

Shortages are temporary

Goods are scarce because resources are scarce. On your island, you did not have unlimited papaya because papaya is scarce.

ScarcityOur resources are insufficient to achieve all our goals and all or wantsWe cannot have everything we wantUsing economic reasoning, i.e. making choices, we can get more from our resources

Factors of ProductionFactors of production are the resources used to make goods and services (land, labor, capital, entrepreneur)

Factors of ProductionLand is all natural resources used to make goods and services (land, coal, water, wood, etc.)

Factors of ProductionLabor is the effort people devote to a task for which they are paid

Factors of Production Capital is any human made resource that is used to produce other goods and services

Factors of ProductionPhysical Capital Human CapitalHuman made objects that create goods or services (buildings, tools, factories.) These things make us more productiveThe knowledge or skills a worker gains through education and experience

Factors of ProductionEntrepreneurship combines all resources to produce a new good or service

Factors of ProductionEntrepreneur's are ambitious leaders who combines land and capital to create and market new goods and services

Guns or ButterGuns or Butter- If a country decides to produce more military goods (guns) then they will have fewer resources to devote to consumer goods ex. Health care, education (butter)

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Trade-offs vs. Opportunity CostsTrade-OffsOpportunity CostsAre an alternative we sacrifice when we make a decisionIndividual trade-offs: Work more, play lessBusiness trade-offs: Produce more coconuts rather than papayaIs the most desirable alternative given up as the result of a decisionEx. You choose to make a life on Aquarius Island rather than try and escapeThinking at the MarginThinking at the margin means deciding how much more or less to do. Usually we dont stay up all night to build shelter. We build part of it one day and build part of it the next day, that way you can still sleep

Cost and Benefit at the MarginWith cost and benefit at the margin, you have to look at how decisions affect how much you spend and how much you gainWhen you sacrifice more than you gain, no more units should be added

Efficiency and ProductivityRemember, the goal of an economy is to be efficient. Efficiency is when an economy uses its resources in such a way as to maximize the production of goods and services.Efficiency means increasing productivity!Production PossibilitiesEconomists often use graphs to help show data.A Production Possibilities Curve shows alternative ways to use an economys productive resources.The Production Possibilities Frontier is a line on the graph that shows the maximum possible output. Each point on the graph represents a trade off.

Production PossibilitiesUsing few resources than an economy is capable of using is underutilization

Production PossibilitiesFor every choice we make, there is a cost.Law of Increasing Costs states that as we shift factors of production from making one good or service to another, the cost of producing the second item increases.