Econ chapter 1

Scarcity

the condition that results from society not having enough resources to produce all the things people want

What to produce

• society must decide what to produce

• Should resources be sent to the production of military equipment or to other items such as food, clothing or housing?

How to produce

Should factory owners use mass production methods that require a lot of equipment and few workers or a lot of workers and less equipment?

who to produce for?

who should society produce for?

• e.g. government employees, workers, professionals

Factors of production

• land

• capital

• labour

• entrepreneurs

Land

-          a natural resource that is not created by human effort

Capital

things made in order to produce more thing

• tools, equipment and factories

Labour

the workers efforts and abilities

Entrepreneurs

people who start a new business or bring a product to a market

Economic products

• goods and services that are useful, relatively scarce and transferable to others

• satisfy human wants

Capital goods

• when manufactured goods are used to produce other goods and services

• machines in a factory, computers used by a business, ovens in a café

Utility

the capacity to be useful and provide satisfaction

• Its subjective, what’s useful to one person might not be useful to another

Value

worth that can be expressed in dollars and cents

Paradox of value

The contradiction between necessities and value

• e.g. water has less value than diamonds because it is abundant so it gives us less satisfaction when acquiring it compared to diamonds

Value. Utility and wealth

• For something to have value, it must also have utility

• Price isn’t based on total usefulness but on how scarce something is and how valuable

Wealth

accumulation of those products that are tangible, scarce, useful and transferable from one person to another

Market

a location or other mechanism that allows buyers and sellers to exchage a certain economic product

Factor market

where productive resources are bought and sold

• labor, land, capital and entrepreneurship

• Households sell the factors and firms buy the factors through income

• Where Businesses get what they need to produce things

Product market

where producer sell their goods and services they create to consumers

• money payment from houses to businesses for goods and services

The circular flow of economic activity

• The factors of production (labour, land, capital) and the products made from them flow in one direction

• The payments for the factors, which consumers spend on goods and services, flow in the opposite direction

Human capital

sum of the skills, abilities, health and motivation of people

Economic interdependence

we rely on others and others rely on us to provide the goods and services that we consume

• e.g. a company that makes capital goods depends on a business

Economic growth

a nation’s total output of goods and services that increases over times

Investing in human capital

• Government can invest in human capital through education and health care

• Businesses can invest in human capital through training and skill improvement programs

• Individuals can invest in their own education by completing high school, going to a technical schools or college

Trade offs

alternative choices

Opportunity cost

cost of the next best alternative use of money, time or resources when one choice is made rather than another

• What you give up when you choose one option instead of the next best alternative

• If you spend $20 on a movie, the opportunity cost might be a book or lunch you could’ve bought instead

Cost benefit analysis

way of thinking about a problem that compares the cost of an action to the benefits received

Production possibilities diagram

diagram representing various combinations of goods and or services an economy can produce when all productive resources are fully employed