Unit 1: Fundamental Economic Concepts

Chapter 1: What is Economics

Lesson 1: Scarcity and the science of economics

Your objectivesBy the end of this lesson, students should be able to:

1. Define scarcity and explain its implications in decision making.

2. Explain the fundamental economic problem.

3. Identify the three basic economic questions every society must answer.

4. Explain how scarcity forces choices by individuals and society.

5. Identify the factors of production and explain how the limited availability of these resources impact choices.

Key Terms

Financial capital

EconomicsFactors of production

Need Want Capital

Scarcity Land Production

EntrepreneurConsumer

goodGross Domestic Product (GDP)

Labor

What is economics and why you should care?

Why should you care?

Discover how modern economies function.

Give you an understanding not only of how they’ve so greatly raised living standards, but also of where they need some improvements.

Judge for yourself the economic policy proposals that politicians & others run around promoting.

Be able to sort the good from the bad.

The Tax Cuts and Jobs Act.

What is Economics?

Framing economics as the science of scarcity.

Without scarcity, there is no need to economize and therefore no economics.

Definition of economics

Economies is the science that studies how people and societies make decisions that allow them to get the most out of their limited resources.

Economics is the study of the use of scarce resources which have alternative uses.

Misconceptions of Economics

Does not tell you how to make money or run a business.

Does not predict the ups & downs of the stock market.

Not about the financial fate of individuals.

It is about the material well-being of society as a whole.

It shows cause & effect relationships involving prices, industry & commerce, work, & pay, or the international balance of trade.

All from the standpoint of how this affects the allocations of scarce resources in a way that raises or lowers the material standard of living of the population as a whole.

Not just about money.

Military medical team arrives near the battlefield.

Allocating scarce resources which has alternative uses.

Never enough medical supplies, doctors, nurses, time, etc.

Decisions have to be made who gets treated first, or at all.

If resources are not allocated efficiently, some wounded soldiers will die needlessly.

Life does not ask us what we want.

Life presents us with choices.

Economics is just one of the ways of trying to make the most of those choices.

Types of Economic systems

Many types of economic systems.

Capitalist, Marxist, Socialist, Communist, Feudal, Mixed, etc.

All of them must determine in one way or another how the available resources are directed toward their various uses.

How well they do it can lead to poverty or prosperity for a whole country.

This what the study of economics is all about and this is what makes it important.

Two ways to look at economics

Microeconomics

Macroeconomics

MicroeconomicsFocuses on individual people and individual businesses.

Individual people

Explains how people behave when faced with decisions about where to spend their money or how to invest their savings.

Individual business

Explains how profit-maximizing firms behave individually, as well as when competing against each other in markets.

Ground level view of the economy.

Macroeconomics

Focuses on the economy as an organic whole, concentrating on factors such as interest rates, inflation, & unemployment.

Includes the study of economic growth & how governments try to moderate the harm caused by recessions.

50,000 foot view of the economy.

What is Scarcity?

Scarcity

The fundamental & unavoidable phenomenon that creates a need for the science of economics.

There isn’t enough time, or resources to satisfy al the wants & needs, so people must make choices about what to produce, how things are going to be produced, & who will get these resources.

America’s Middle Class

One of the wealthiest groups of human beings to ever inhabit Earth.

Over the last two decades, news organizations report the middle class is just getting by.

Middle-class Americans’ desires exceed what they can comfortably afford, even though what they already have would be considered unbelievable prosperity by people in many other countries around the world or even by earlier generations of Americans.

The reality is there has never been enough resources to satisfy everyone completely.

This is what scarcity means.

Nothing has been more pervasive in the history of the human race than scarcity & all the requirements for economizing that go with scarcity.

Three basic questions

All economic systems must answer 3 basic questions.

How well or how poorly they answer these questions determine the prosperity of the society.

What to produce?

How to produce it?

Who gets what is produced?

What is produced?

Since a society cannot have everything, it must decide how to use its resources.

Military, education, healthcare, clothing, housing, etc.

How to produced it?

Should business owners use mass production methods requiring technology & machines & less workers, or less equipment & more workers?

Who will receive it?After society has decided what & how to produce, these produced items need to go to someone.

How is this decided?

Government planners or the free enterprise market?

Factors of Production

Due to the scarcity of resources, people & countries cannot have everything they want.

Factors of production are the required resources needed to produce the things we need and want.

Land

Capital

Labor

Entrepreneurs

Land

Natural resources includes anything natural found on or inside the Earth.

CapitalPhysical capital

Tools, equipment, machinery, buildings used in the production of goods and services.

Financial capital

Money used to buy tools and equipment used in production.

Capital is unique since it is the result of production.

While a tractor is capital, it was built in a factory, it is the result of earlier production.

Labor

People with all of their efforts, abilities, and skills.

EntrepreneursNot considered labor.

Risk-takers in search of profits who either creates something new or makes something already in existence better with the resources available to them.

They are the driving force behind the economy.

They start new business, employ the most people.

Production

When all factors of production are present, the production process of creating goods & services can take place.

The Scope of Economics

Economics is the study of human efforts to satisfy the unlitmited & competing wants through careful use of scarce resources.

Econ deals with human behavior regarding the choices they make.

Four key elements to the study of human behavior regarding the choices they make.

1. Description

2. Analysis

3. Explanation

4. Prediction

Description

Description of economic activity.

Gross Domestic Product (GDP)

The dollar value of all final goods & services, & structures produced within a country’s boarders in a 12-month period.

GDP-Most comprehensive measure of a country’s total output & is a key measure of the nation’s economic health.

Economist also describes the following areas within the national economy.

What is produced & who receives it.

Unemployment rate

Inflation

International trade

Interactions between business & labor

Affects of government spending & taxes.

Description is important because we need to know what the world around us looks like.

But we also need to know the “why” & “how.”

AnalysisAnalyzing economic activity tells us the “why” & “how.”

Why is some prices high while others are low?

Why do some people earn more than others?

How do taxes affect people’s desire to work & save?

Analysis helps us to discover why things work & how things happen.

Knowing this helps us deal with problems that we want to solve.

Prediction

Economist want to know what will will happen if “A” or “B” happens to the economy.

What will happen if property taxes increase instead of business taxes.

Will the The Tax Cuts and Jobs Act reduce the American tax burden & lead to increased jobs & higher wages?

Economics studies what is & trends, it can help predict what likely will happen.

Consequences for choosing “A” or “B.”

The actual decisions about economic choices made are the responsibly of all citizens in our republic.

It is your responsibly to understand, & utilize sound economic decisions in your private life as well as at the voting booth.