Economics Defined

1
Chapter 1
Economics Defined How people and institutions
make choices How the choices determine how
resources are used
2
Economics as a Science

• Social science
• Study of the behavior and interactions of human
  beings as individuals and in groups
• Coordinated, arranged, and systematized according
  to general laws and principles

3
Economic Theory and Policy

• Economic Theory
• Develops rules and principles (models)
• Guide for action under a given set of
  circumstances (comparative static)
• Economic Policy
• What is actually done under a given set of
  circumstances
• Political, military, and social aspects

4
Production

• Production (physical good or service)
• Creation or addition of utility
• Utility ? ability of a good or service to satisfy
  a want and/or need
• Total product ? sum of all goods and services
  produced by an economy over a given period of
  time

5
Distribution

• Distribution
• Allocation of the total product among productive
  resources
• Monetarily ? distribution of money incomes among
  the owners of the productive resources

6
Productive Resources

• Inputs or resources necessary before a person or
  business can engage in the production of a good
  or service
• Labor ? time and effort expended by human beings
  involved in the production process
• Land ? the resources of the land, sea, and air
• Capital ? goods used to produce other goods and
  services
• Entrepreneur ? person who organizes and assumes
  risk
• Enterprise ? act of organizing and assuming the
  risk of a business venture

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Functional Distribution of Income
RESOURCES Labor Land Capital Entrepreneur
TYPES OF PAYMENT Wages Rent Interest Profits
TOTAL PRODUCT
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Economic Good

• Object or service characteristics
• Utility
• Transferable (service?)
• Scarce
• Not a sufficient amount available to meet
  everyones wants
• Price has to be paid to obtain the good or
  service
• Greater the scarcity, the greater the value or
  price

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Goods and Services
Consumer goods

Capital goods
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Consumer and Capital Goods

• Consumer Goods
• Goods that are directly used by the consuming
  public
• Books, paper, food, clothing
• Durable and nondurable
• Capital goods
• Goods used to produce other consumer or capital
  goods
• Buildings, machinery, equipment
• Durable and non-durable

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Positive and Normative Economics

• Positive economics
• Economics of what is
• Relationships that are verifiable
• Normative economics
• Economics of what ought to be
• Combines economics and politics and policy

12
Micro and Macroeconomics

• Microeconomics deals with the economic problems
  of the individual, the firm, and the industry
• Macroeconomics deals with the aggregates of
  economics - total production, total employment,
  and general price level

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Chapter 2 Making Choices (allocation)

• Individual choices
• time
• income
• National choices
• Labor
• Land
• Capital
• Enterprise (entrepreneurs)

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Production Possibilities Curve

• Shows the alternative combinations of different
  goods that a society can produce given its
  available resources and technology
• In a given period of time

gtExcel example
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Shape of the PPC

• PPC is curved outward because resources are not
  equally suited for producing both goods
• As we move from one point on the PPC to another
  the opportunity cost increases
• Opportunity cost how much of one good must be
  given up to increase production of another good

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Sources of Economic Growth

• Addition of labor and capital
• New technology
• Invention and innovation
• Discovery of new resources
• Improvements in productivity
• Better educated or more skilled labor force

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Problems of Scarcity

• Some areas of the world lack proper ratio of
  land, labor, and capital given technology
• Some areas lack proper ratio of capital and
  technology, natural resources, or skilled labor
• Solutions include
• increased productivity
• aid to developing nations form of aid?

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Specialization and Exchange

• Exchange
• process of trading surplus quantities of
  specialized products to others for other goods
  and services (trade)
• Specialization
• process of limiting the scope of of an economic
  units productivity instead of trying to produce
  everything it needs

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What to Produce for Exchange Absolute Advantage

• Absolute Advantage
• The ability to produce a good or service using
  fewer resources than other producers use or being
  able to produce more with the same amount of
  resources
• May not be reasonable basis for trade, when one
  party can produce both goods or services more
  efficiently

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What to produce for Exchange Comparative
Advantage

• Ability to produce a good or service at a lower
  opportunity cost than other producers face
• Parties should produce the good in which it has
  the lower opportunity cost

gtExcel example