Topic 1.1 Scarcity

Scarcity

we have unlimited wants but limited resources

• make choices on how we use our resources

Economics

social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants

• science of scarcity

• study of choice

Microeconomics

study of how small economic units such as individuals, firms, and markets

• ex: supply and demands in specific industries, production costs, labor markets. . .

Macroeconomics

study of large economies as a whole or economic aggregates

• ex: economic growth, government spending, inflation, unemployment, international trade. . .

Theoretical Economics

using the scientific method to make generalization and abstractions to develop theories

Policy Economics

applied theories to fix problems or meet economic goals

Positive Statements

based on facts; avoids value judgements

Normative Statements

includes value judgements

5 Key Economic Assumptions

1. society has unlimited wants but limited resources (scarcity)

2. due to scarcity, choices must be made; every choice has a cost (a trade-off)

3. Everyone’s goal is to maximize their satisfaction; everyone acts on their own “self-interest”

4. Everyone makes decisions 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

Utility

satisfaction (the measurement of)

Marginal

additional

Allocate

distribute

Price (what’s the price?)

amount the buyer (or consumer) pays

Cost (how much does that cost?)

amount the seller pays to produce a good

Investment

the money spent by businesses to improve their production

Consumer Goods

created for direct consumption

Capital Goods

created for indirect consumption

• goods used to make consumer goods

4 Factors of Production

Land, Labor, Capital (physical and human capital), and Entrepreneurship

Land

all natural resources that are used to produce goods and services

Labor

any effort a person devotes to a task for which that person is paid

Physical Capital

any human-made resource that is used to create other goods and services

Human Capital

any skills or knowledge gained by a worker through education and experience

Entrepreneurship

ambitious leaders that combine the other factors of production to create goods and services

• take initiative

• innovate

• act as the risk bearers

• to obtain profit