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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

What is Economics?

Chapter 1 Notes

  • 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
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
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
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 chain1
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
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 resources1
4 Types of Productive Resources

Resources are important to the success of a

business & to the U. S. economy

opportunity cost
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
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 thinking1
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
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
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
  • 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
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
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 economics1
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 & Services
  • Goods – physical products businesses produce
  • Services – “can’t touch these”; performed for someone else
  • 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