Introduction to Economics: Scarcity

what is economics?

• economics: the science of scarcity

• scarcity: the idea that we have unlimited wants but limited resources

• since we are unable to have everything we desire, we must make choices on how we will use our resources

• economics is the study of choices

• we will study the choices of individuals, firms, and governments

• eg. you must choose between buying jeans or shoes, businesses must choose how many people to hire, governments must choose how much to spend on welfare

textbook definition

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

• study of how individuals and societies deal with scarcity

micro- v. macroeconomics

• microeconomics: the study of small economic units such as individuals, firms, and markets

• eg. supply and demand in specific industries, production costs, labor markets

• macroeconomics: the study of the economy as a whole or economic aggregates

• eg. economic growth, government spending, inflation, unemployment, and international trade

how is economics used?

• theoretical economics: the use of the scientific method by economists to make generalizations and abstractions to develop theories

• policy economics: the application of theories developed by theoretical economics to fix problems or meet economic goals

positive v. normative

• positive statement: a statement based on facts, avoiding value judgements (what is)

• normative statement: a statement that includes value judgements (what should be)

5 key economic assumptions

1. scarcity — society has unlimited wants and limited resources.

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

3. everyone's goal is to make choices that maximize their satisfaction; everyone acts in 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.

economic terminology

• utility: satisfaction

• marginal: additional

• allocate: distribute

price v. cost

• price: the amount the buyer/consumer pays to purchase a good

• cost: the amount the seller pays to produce a good

investments

• investment: the money spent by businesses to improve their production

• eg. $1 million new factory

• consumer good: a product created for direct consumption

• eg. pizza

• capital good: a product created for indirect consumption

• goods used to make consumer goods

the four factors of production

all resources can be classified as one of the following four factors of production —

1. land: all natural resources that are used to produce goods and services

2. eg. water, sunlight, plants, animals

3. labor: any effort a person devotes to a task for which that person is paid

4. eg. manual laborers, lawyers, doctors, teachers, waiters

5. capital

6. physical capital: any human-made resource that is used to create other goods and services

7. eg. tools, machinery, buildings, factories

8. human capital: any skills or knowledge gained by a worker through education and experience

9. entrepreneurship: ambitious leaders that combine the other factors of production to create goods and services

10. eg. henry ford, bill gates, inventors, store owners

11. entrepreneurs take initiative, innovate, and ask as risk bearers so they can obtain profit

12. profit = revenue - costs

productivity

• productivity: a measure of efficiency that shows the number of outputs per unit of input

• eg. bob can make 10 pizzas/hour, stan can make 5 pizzas/hour → bob is more productive