Unit 1: Basic Economic Concepts

Economics Definition

• Social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants 

  • 4 Main resources are known as the Factors of Production

Scarcity

The condition in which our wants are greater than our limited resources. An item must be desired and limited to be scarce

Factors of Production (FOP)

1. Four main resources:

2. Land

3. Labor

4. Capital

5. Entrepreneurship

Land (FOP)

natural resources used to produce goods and services, anything that comes from the land. Income that resource owners earn in return for land resources is called rent

Labor (FOP)

the effort that people contribute to the production of goods and services, wages

Capital (FOP)

the machinery, tools, and buildings humans use to produce goods and services. The income earned by the owners of capital resources is interest

Entrepreneurship (FOP)

An entrepreneur is a person who combines the other factors of production - land,labor, and capital - to earn a profit. Risk takers! The payment is profit

Theoretical Economics

Economists use the scientific method to make generalizations and abstractions to develop theories

Policy Economics

Theoretical Economics are applied to fix problems or meet economics goals

Positive Economics

The branch of economics analysis that describes the way the economy actually works. 

• Ex. The unemployment rate was 4.3%

Normative Economics

Makes predictions about the way the economy should work (value judgements) 

• The job market’s getting worse

• Each block should be 40 minutes

Marginal Analysis

Involves making decisions based on the additional benefit vs. the additional cost

5 Key Economic Assumptions

1. Societys’ wants are unlimited, but ALL resources are limited (scarcity)

2. Due to scarcity, choices must be made. Every choice has a cost( a trade off)

3. Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest”

4. Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice

5. Real-life situations can be explained and analyzed through simplified models and graphs

Trade Offs

All the alternatives that we give up whenever we choose one course of action over others

• Ex. Going to the movies instead of studying

Opportunity Cost

The most desirable alternative given up as a result of a decision