What is economics
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What is Economics?. Chapter 1 Notes. Economics. Economics is a social science that studies how people, acting individually or in groups, decide how to use scarce resources to satisfy their wants . Economist Alfred Marshall stated that economics is about the “ordinary business of life.”

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What is Economics?

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What is Economics?

Chapter 1 Notes


Economics

  • Economics is a social science that studies how people, acting individually or in groups, decide how to use scarce resources to satisfy their wants.

  • Economist Alfred Marshall stated that economics is about the “ordinary business of life.”

  • Ordinary business is about how people choose to satisfy their wants.


Scarcity & Opportunity Cost

  • “People are never satisfied.”

  • Scarcity means that an inequality exists between wants & the resources available to satisfy them

  • Scarcity is the fundamental problem in economics

  • Scarcity = wants > available resources

  • Scarce resources have not always been scarce (i. e. oil)


Human Wants

  • Physical vs. psychological wants

  • Food, clothing, water and shelter are necessary to maintain a healthy, safe life

  • Physical wants change as we mature

  • Psychological wants are not necessary to existence but make us feel better & even happier


The Want-Satisfaction Chain

  • Trying to satisfy people’s wants is a complex process

  • In an economy, millions of people work in thousands of businesses to produce & distribute goods & services to satisfy people’s wants.

  • Turn to Figure 1-1 on page 3


The Want-Satisfaction Chain

  • Human want

  • Resources to produce the want

  • Production of good or service

  • Finished good or service (or product)

  • Distribution

  • Consumption

  • Want-satisfaction is the result

  • Want-satisfaction begins all over again


4 Types of Productive Resources

1. Natural resources - unaltered gifts of nature (soil, minerals, timber, water, etc)

2. Human resources (or labor) – the physical & mental efforts people use to create goods & services

3. Capital resources – buildings, tools, machines people create & use to produce final goods & services

4. Entrepreneurship – is the imagination, innovative thinking & management skill needed to start & operate a business

Entrepreneurs are willing to take risks in the hope of making a profit


4 Types of Productive Resources

Resources are important to the success of a

business & to the U. S. economy


Opportunity Cost

  • Scarcity forces us to think about our alternatives

  • Opportunity cost is the highest valued alternative given up as a result of making a choice


The Economic Way of Thinking

  • John Maynard Keynes said economics

    “…is a method…an apparatus of the mind, a

    technique of thinking.”

    Key Ideas:

  • Scarcity forces people to choose

  • All Choices Involve Alternatives

  • People try to make good choices


The Economic Way of Thinking

4. People respond to incentives

5. People gain when they trade voluntarily

6. Choices are future-oriented

7. Our choices are influenced by the choices of others

8. Applying the economic way of thinking


Thinking at the Margin

  • Marginalsimply means the extra benefit or additional costs or benefits of a decision

  • Every choice involves benefits and costs

  • As long as a decision has more benefit than the costs, it is worth it to continue


Choice-making by Businesses

  • The profit motive is an incentive for a business

  • The business must sell enough of its product to exceed costs

  • Profit = Total Sales > Total Costs

  • Business people think at the margin

    (As long as the benefit or profit exceeds the costs, they will continue to produce)


Market Economy

  • Market Economy – an economy that relies on voluntary trade as the primary means of organizing & coordinating production

  • Amarket is an arrangement that allows buyers & sellers to trade with one another


Basic Economic Decisions in a Market Economy

  • What are the 3 Basic Economic Decisions of Economic Systems?

    1. What goods & services to produce?

    2. How should goods & services be produced?

    3. For whom will goods & services be produced?


Two Branches of Economics

  • Macroeconomics is the study of the economy as a whole

    1. Examines the “big picture.”

    2. Unemployment, production level of a country, inflation, poverty, long-term economic growth


Two Branches of Economics

  • Microeconomics is the study of individual consumers & businesses

    1. Examines the choices that individuals, families & businesses make

    2. How much to charge for an event, Employee wages, advertising campaign, etc.,


Goods & Services

  • Goods – physical products businesses produce

  • Services – “can’t touch these”; performed for someone else


Utility

  • Utility refers to the usefulness or satisfaction of something

  • People have different utilities for different items and it effects how much they are willing to pay for goods & services


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