Economic Way of Thinking by pengtt


									Economic Way of Thinking

The condition that results from society
   not having enough resources to
 produce all the things people would
             like to have.
  Scarcity Qualifications

1. Limited in quantity
2. Be desirable
3. Have more than one valuable use
Everything has a cost!

        Free Puppies!
No such thing as a Free Lunch!
People choose for good
      Cost and Benefits
 Different Values = Different
Incentive Matters

Rent control in New York
 Supply and Demand
People create economic systems
   to influence choices and
   Market vs Command Economies
   As rules change incentives and
          behavior change
People gain from voluntary
    Makes them better off
     No benefit = no trade
   Economics is about trade!
Economic thinking is marginal
    Marginal choices involve the
      effects of additions and
The value of a good or service is
 affected by people’s choices.
      Value is determined by the
   preferences of buyers and sellers
Economic actions create
  secondary effects.
Rent controls make apartments more
        affordable to some.
Less profitable to build and maintain.
The test of a theory is its
ability to predict correctly.
   It the theory correctly predicts the
 consequences of actions, it is a good
         Proof is in the pudding!
So what is Economics?

 Economics is the study of how
people satisfy wants with scarce
        Mom I NEED food!
        Mom I WANT Pizza!

• NEED: basic requirement for survival
  – Food, clothing, shelter

• WANT: way of expressing a need
There Is No Such Thing As
       FREE Lunch!
    Buy one, Get one Free
          Who pays?
Decisions on how to use our limited
• WHAT to produce?
• HOW to produce?
• FOR WHOM to produce?
        WHAT to produce?
• Military Equipment v. other goods (food
  clothing housing)
• Should its limited resources be used for
• Cannot Please everyone….MUST make a
  decision on WHAT to produce!
          HOW to produce?
• Mass production
  – Equipment v. workers
  – Low v. high production cost
  – Less expensive = available to the masses
    FOR WHOM to Produce?
• Must be allocated to someone
• Not enough?
  – A choice must be made
  – Who will receive it?
   Three questions MUST be
answered b/c of limited resources
          Wants                  Resources



WHAT to               HOW to                   FOR
produce               produce                WHOM to
Factors of Production
• “Gifts of nature” (natural resources)
• Fixed or limited in supply
• Good farmland, sandy beaches, oil and
• Scarcity increases as population grows
• Tools, equipment, machinery, and
  factories used in production of goods and
  services (capital goods)
• Financial Capital: money used to buy
  capital goods
• Computers in school: used to produce the
  service of education
• People with effort, abilities, and skills
  – Exclude the group called entrepreneurs
  – Vary in size
  – Why would the labor force vary in size?
• Innovators responsible for change in our
• Risk-taker
  – Profits
  – New with existing resources
• Start new businesses/ new products
• Initiative that combines resources (land,
  labor, capital)
• Factors of production are present =
• Creating of goods and services can take
  – Schools:
    •   Capital goods?
    •   Labor?
    •   Land?
    •   Entrepreneurs?
Gross Domestic Product (GDP)
• It is the most important measure of the
  overall economy.
• It is the overall dollar amount of all goods
  and services produced within the United
  States borders in a year.
• American goods made in other countries
  are NOT counted (ford plants in Mexico)
• Nissan plants in Tennessee DO count
  toward GDP
• Secondhand sales do NOT count toward
  GDP – Used Cars, Garage Sales, Thrift
  Stores because they have already been
• Illegal activities such as drug sales, illegal
  gambling do NOT count.
            Scope of Economics
• Description
   – GDP: dollar value of all final goods and services produced within
     a countries boarders
   – Need to know what the World around looks like
• Analysis
   – Why are prices of some items high while others are low?
   – Why things work and how things happen
• Explanation
   – Communication of knowledge to others
• Prediction
   – Rise and fall of Income
   – Make best decision: what is, what tends to be, and what may
Basic Economic Concepts
 Goods, Services, and Consumers
• Economic Products:
  – Goods and services that are useful, scarce,
    and transferable to others
  – Cannot get enough to satisfy ones wants and
  – Command Price
• Item that is economically useful or satifies an
  economic want
• Consumer Goods:
   – Final use by individuals
• Capital Goods:
   – Manufactured goods used to produce other goods
     and services
• Durable Goods:
   – Any good last three or more years when used on a
     regular basis

Work that is preformed for someone
  Intangible: cannot be touched

Person who uses goods and
services to satisfy wants and
Value, Utility, and Wealth

Value refers to a worth that can be
 expressed in dollars and cents
           Paradox of Value
• Contradiction between necessities and
• Water v. Diamonds
• Scarcity is required for value
  – Is it enough?
• The capacity to be useful and provide
• Not fixed or measureable
• Vary from person to person
• i.e.: One person may enjoy a rock/R&B
  concert, another may not
• Value = Scarce + Utility
• Water v. Diamonds
• Accumulation of those products that are
  tangible, scarce, useful, and transferable
• Nations wealth: includes natural
  resources. Factories, houses, etc
• Services are not counted as wealth
• The Wealth of a Nation, 1776 by Adam
  Smith (read page 18 profiles in
The Circular Flow of
    Factor Markets
    Product Markets
The Circular Flow of Economics
• Markets: location or other mechanism that
  allows buyers and sellers to exchange a
  certain economic product
• Factor Markets: Where productive
  resources are bought and sold. (sell your
  labor for wages)
• Product Markets: producers sell their
  goods and services to consumers ( you
  use to money you made to buy products)
  Productivity of Economic Growth
• Economic Growth:
  – nations OUTPUT of goods and services
    increases over time
  – Circular flow chart:
     • Means more factors of production (goods/services)
       flowing in once direction
• Productivity:
  – Measure of the amount of output produced by
    a given amount of inputs in a time period
     • The most efficient capital goods/most fertile land
           Division of Labor
• Individual workers do fewer task
• Become proficient in a task v. less
  proficient in hundreds of task
• FOP can perform tasks that they can do
  more efficiently than others
  – Industry robots
  – Regional specialization: GA =
               Henry Ford
• Assembly line
  – Cut time necessary to make a car
  – Cut the price of the car
  Investing and Human Capital
• Human Capital: sum of the skills, abilities,
  health, and motivation of people
  – Gov’t can invest: Education and health care
  – Businesses: training/programs to improve
  – Individuals: invest in their education
• Invest: Human+Physical Capital leads to
  an increase in production = ECONOMIC
   Economic interdependence
• We rely and others and others rely on us to
  provide goods and services that we consume
  – Cars are built in the US but parts may be made in
    another country
• Labor disputes:
  – Basketball affects people who park cars, sell tickets,
    serve food at the games, see apparel, etc
  – Drought/hurricane/flooding in one country can effect
    price of goods in another
•   Economics: Principles and Practices
•   Chapter 1
•   Gary E. Clayton, Ph.D.
•   McGraw, Glencoe
•   2005

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