Part One: What is Economics?

Part ONE: What is Economics?

Vocabulary:

scarcity capital
financial capital labor
entrepreneur production
economics
economy need
want tradeoff factors of production land

Essential Questions:
1. What is the fundamental economic problem?
2. What are the three basic economic questions every society must decide?
3. Explain the relationship among scarcity, value, utility, and wealth
4. Describe the circular flow of economic activity
5. Analyze trade-offs and opportunity costs.
6. Explain decision-making strategies.

“Why are some people rich and others poor?”
• This question began the study of economics
• Adam Smith & The Wealth of Nations
– Competition is key; too much government involvement stifles the economy
– People want things they need & things that make life easier

Micro vs Macro
• Microeconomics: looks at decisions made by individuals, households, & businesses
• Macroeconomics: looks at the economy as a whole

The Problem…
• Scarcity: unlimited human wants meet limited resources.
• Economics is the study of how people satisfy wants with scarce resources.
• Needs are required for survival; wants are desired for satisfaction.

“There’s No such thing as a free lunch”
• The name given to the idea that everything has tradeoffs, even a free meal.
• For everything you want, something else has to be given up.

It’s all about making decisions…
• Should you do/buy/take this or that?

Principles of Economics
1. Scarcity = tradeoffs
2. Costs vs Benefits
3. Thinking at the margin (+ or – one more)
4. Incentives matter
5. Trade makes people better off
6. Markets coordinate trade
7. Future consequences count

• Margins – the edges of things
• Marginal cost = what you give up to add one more unit of something
• Marginal benefit = what you gain
• Incentive = something that motivates a person

Three Questions to Consider:
• What to produce?
• How to produce it?
• Who to produce for?

The Factors of Production: resources necessary to produce what people want or need.

Land
Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate.

Labor
• Labor is the workers who apply their efforts, abilities, and skills to production.

Capital
• Capital is the means by which something is produced such as money, tools, equipment, machinery, and factories.

Entrepreneurs
• Entrepreneurs are risk-takers who combine the land, labor, and capital into new products.

Production
• Production is creating goods and services—the result of land, capital, labor, and entrepreneurs