Chapter1 PP

Chapter 1: Economics

Introduction to Economics

• Economics: Study of decision-making under scarcity.

• Scarcity: Human wants exceed available resources.

• Importance: Understanding how to use resources to meet needs.

Chapter Outline

• 1.1: What is economics and why is it important?

• 1.2: Microeconomics vs. Macroeconomics

• 1.3: Use of theories and models in economics

• 1.4: Overview of economic systems

What is Economics and Why is it Important?

• Economics explores individual, family, business, and societal decisions.

• Resource types include:

  • Land: Natural resources (e.g., copper, oil).

  • Labor: Human work effort.

  • Capital: Physical equipment and inventory.

  • Entrepreneurship: Skills for managing production.

• Referenced resource: Federal Reserve Economic Data (FRED) for economic data.

Opportunity Cost

• Opportunity Cost: The value of the next best alternative forgone when making a decision.

• Related concepts:

  • Trade-Offs: Choices made due to scarcity.

  • No Free Lunch Principle: Every choice incurs a cost.

Comprehensive Study of Economics

• Adam Smith: Father of modern economics, emphasized rational self-interest.

• Invisible Hand Concept: Individual self-interest leads to societal benefits.

Division of Labor

• Definition: Workers perform specific tasks to enhance efficiency.

• Benefits include:

  • Increased output.

  • Enhanced skill development.

  • Lower production costs.

Microeconomics vs. Macroeconomics

• Microeconomics: Focus on individual economic agents (e.g., households and firms).

  • Example Questions:

    • College major choices.

    • Airline mergers impact on ticket prices.

• Macroeconomics: Examines overall economic issues (e.g., inflation, growth).

  • Example Questions:

    • U.S. economic growth rates.

    • National unemployment rates.

Economic Policy

• Monetary Policy: Managed by central banks (like the Federal Reserve).

  • Controls interest rates and money supply.

• Fiscal Policy: Government spending and taxation decisions by various government levels.

Understanding Economic Models

• Economic Theory: Simplified representation of economic interactions.

• Use of Models: Test and analyze economic theories.

Circular Flow Diagram

• Illustrates interactions between households and firms in goods and services and labor markets.

Economic Systems Overview

• **Types of Economies: **

  • Traditional Economy: Agricultural, little economic progress.

  • Command Economy: Centralized decision-making by government.

  • Market Economy: Decentralized with private ownership of production.

• Mixed Economies: Combination of various economic systems.

Globalization and the Global Economy

• Globalization: Increasing cross-border market transactions.

• Exports: Goods produced domestically and sold abroad.

• Imports: Goods produced abroad and sold domestically.

• GDP: Measures total production in an economy.