What is economics

• Economics is the science of scarcity.

• Scarcity- 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.

  
  Economics- Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants.

  
  MICROECONOMICS V MACROECONOMICS

  Microeconomics

• Study of small economic units such as individuals, firms, and markets. 

  Examples- Supply and demand in specific industries, production costs, labor markets

  Macroeconomics

• Study of the large economy as a whole or economic aggregates.

  Examples- economic growth, government spending, inflation, unemployment, international trade

  
  How is economics used?

• Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics.

• These theories are then applied to fix problems or meet economic goals. This is called policy economics. 

Positive vs. Normative 

Positive Statements- Based on facts. Avoids value judgements (what is).

Normative Statements- Includes value judgements (what ought to be).

5 Key Economic Assumptions

1.  Society has unlimited wants and 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 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.

Price vs. Cost

What’s the price? vs. How much does that cost?

Price= Amount buyer (or consumer) pays.

Cost= Amount seller pays to produce a good.

Investment

Investment = The money spent by BUSINESSES to improve their production.

Ex: $1 Million new factory  

• Consumer Goods- created for direct consumption. (example: pizza)

• Capital Goods- created for indirect consumption. (oven, blenders, knives, etc.)

  • 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 used to produce goods and services. (Ex: water, sun, plants, animals)

2. Labor -Any effort a person devotes to a task for which that person is paid. (Ex: manual laborers, lawyers, doctors, teachers, waiters, etc.)
3. Capital - 

Physical Capital- Any human-made resource used to create other goods and services. (Ex: tools, tractors, machinery, buildings, factories, etc.)

Human Capital- Any skills or knowledge a worker gains through education and experience. 

4. Entrepreneurship - Ambitious leaders that combine the other factors of production to create goods and services. 

Productivity
Productivity = A measure of efficiency that shows the number of outputs per unit of input.

Why do businesses and countries want to improve their productivity?

Since all resources are scarce, improving productivity allows us to produce more stuff with fewer resources.

we have unlimited wants and unlimited needs