What is Economics? Chapter 1

economics

the study of how organizations use limited resources to satisfy unlimited wants and needs

scarcity

limited quantities of resources to meet unlimited wants

factors of production

land, labor, capital, entrepreneurship (the resources that are used to make all goods and services)

Utility

The ability of a good or service to satisfy wants.

land

natural resources such as land, water, and trees

goods

tangible items that people can buy; physical objects such as clothes or shoes

services

actions or activities one person performs for another

Labor

Human effort

entrepreneurship

the ability of individuals to start new businesses or invent new processes

opportunity cost

The next best alternative given up as the result of a decision

production possibilities curve

an economic model to show the maximum combinations of goods and services that can be produced from a fixed amount of resources

need

something like air, food, or shelter that is necessary for survival

want

an item that we desire but that is not essential to survival

shortage

a situation in which a good or service is temporarily unavailable

labor

the effort that people devote to a task for which they are paid

physical capital

all human made goods that are used to produce other goods and services; tools and buildings

human capital

the skills and knowledge gained by a worker through education and experience

guns or butter

a phrase that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

thinking at the margin

deciding whether to do or use one additional unit of some resource

production possibilities frontier

the line on a production possibilities graph that shows the maximum possible output and trade-off of goods and services

efficiency

using resources in such a way as to maximize the production of goods and services

underutilization

using or producing fewer resources than an economy is capable of using or producing

law of increasing cost or diminishing returns

law that states that as we shift factors of production from making one good or service to another the cost of producing the second item increases

Value

worth in a monetary fund

Durable Good:

Lasts more than 3 years.

Nondurable Good:

Lasts less than 3 years.

Consumer Good:

Use by individuals.

Capital Good:

Used to produce other goods.

Wealth

The accumulation of tangible, scarce, useful, and transferable goods.

Paradox of Value:

The contradiction between the high value of non-essentials (like diamonds) and low value of essentials (like water).

TINSTAAFL:

"There is no such thing as a free lunch." Even free goods or services have a cost to someone.

Fundamental Economic Questions:

- What to produce?

- How to produce?

- For whom to produce?

Scope of Economics:

1. Description: e.g., GDP - Gross Domestic Product measures a country’s total output.

2. Analysis: Examining economic activity.

3. Explanation: Explaining findings.

4. Prediction: Forecasting future economic conditions.

- Trade-Offs:

Choosing one option means giving up others.

Economic Growth:

An increase in the output of goods and services over time.

Specialization:

Focus on specific tasks can improve efficiency and lead to growth.

Economic Interdependence:

Mutual reliance between individuals, businesses, or nations for goods and services.

Circular Flow of the Economy:

Describes how money flows through the economy between businesses, households, and the government.

- Cost-Benefit Analysis:

Weighing the benefits of an action against its costs.

Population

is growing more people whose needs and wants have to be satisfied

Pros

Cons

Definition of Economics

The study of economics is more than explaining how people deal with scarcity -

it also includes the study of how things are made, bought, sold, and used. It

provides insight as to how incomes are earned and

Practice Questions:

What are examples of durable vs. nondurable goods?

- Explain the paradox of value using diamonds and water.

- How do the factors of production affect economic output?