WHAT IN THE HECK IS ECONOMICS ?
Economics Mr. Cline Marshall High School Unit One AB * Decisions….Decisions
• Economic Perspectives
• The main resources that go into the production of a good or service are known as The Factors of Production. The Factors of Production are Land, Labor and Capital.
• Economists use the term land to refer to all natural resources used to produce goods and services. This includes iron ore mined from a mountain, and then smelted to make steel that is then used as a frame for your car, or even the cattle raised to be later turned into a pair of shoes, or a hamburger.
• Labor is the effort and time that a person devotes to a task for which that person is paid. Labor includes the performance of a check up by a doctor, or the mechanic tightening a clamp on your car, or even any of you serving a meal at your jobs.
• Capital is any human made resource that is used to produce other goods and services. The term can be broken down even further into two separate and distinct categories, physical capital and human capital. * Decisions….Decisions
• Economic Perspectives
• Physical capital is any human made object that is used to create other goods and services. The term physical capital is also synonymous with the term capital goods.
• Physical capital includes buildings, tools, assembly lines, power point slides from annoying little econ teachers, and even money, etc.
• The Nike factory where their shoes are made consists of the physical capital of the building wherein the factory is located, all of the sewing machines inside it, the conveyor belts used to move the product to each step in the process, etc.
• Even the snack vending machine in the employee lounge is physical capital, because it keeps employees happy and their stomachs full, and thus keeps their energy and strength up, so that they can then remain productive and create other goods and services. * Decisions….Decisions
• Economic Perspectives • You do not necessarily need to be a business to invest in physical capital. The car your family owns to make transportation easier for your family is also a form of physical capital on the individual level.
• Investments in physical capital usually show a high rate of return . Rate of Return can be defined as the gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. It is also known as Return on Investment (ROI).
• Another way to put it is when we create or buy physical capital to accomplish a job, we usually become more productive. For example; • Suppose that a family of 6 people wash dishes by hand every day after every meal, breakfast, lunch and dinner, for a total of 21 meals per week. • It takes 30 minutes per meal for two family members working together to scrape, stack, wash, rinse, dry, and put away the dishes. • That’s 21 hours per week (nearly one day a week engaged in this simple activity) that could have been spent on other more productive activities. • How could this family improve their efficiency? Particularly utilizing physical capital?
* Decisions….Decisions
• Economic Perspectives
• Another way to put it is when we create or buy physical capital to accomplish a job, we usually become more productive. For example; • Now, suppose that the family decides to buy a dishwasher for $400.00. Using the dishwasher, it will take 15 minutes for a single family member to clean up after each meal. • At this rate, it will take the entire family only 5 ¼ hours per week to handle this chore. • The benefits this family would receive in terms of the free time would cover the cost of the dishwasher, which provides the typical benefits of physical capital: • Extra Time- Time is a scarce resource with alternative uses, and the 15 ¾’s hours gained by this family can be put to those alternative uses now without sacrificing something else. So, with economics you can literally have your cake and eat it too! • More Knowledge- By learning how to wash the dishes by machine, the family has learned more about using household appliances in general. They can apply that knowledge to the use of other labor-saving devices such as a washer and dryer, and a microwave oven.
* Decisions….Decisions
• Economic Perspectives
• Human Capital is the knowledge and skills a worker gains through education and experience.
• Doctors use the physical capital of a stethoscope, and the human capital of their years of schooling to assist you in managing your health care. Both forms of capital are extremely important and necessary to the functioning of an economy. An economy consists of the economic systems of a country or other area; the labor, capital, and land resources; and the manufacturing, production, trade, distribution, and consumption of goods and services of that area.
• Human capital is expensive, and is often the largest cost in any economic endeavor. When an employer has an employee who has been with their firm for 20+ years, they will pay that employee more, offer them more benefits, etc., because it would be cost prohibitively expensive to get an employee to come in off of the streets that would have the same knowledge and experience. * Decisions….Decisions
• Economic Perspectives • If land, labor and capital are the resources needed to run an economy, who brings all of these things together to make it successful?
• The answer is people we refer to as entrepreneurs (we will discuss more about these individuals when we discuss what is business.) An entrepreneur is an ambitious leader who combines land, labor and capital in creative ways to create and market new goods and services.
• For example; after fishing in sub-zero temperatures in Labrador during 1912, a man named Clarence Birdseye was astounded that his frozen fish was tasty when he thawed and cooked it weeks later. This entrepreneur soon patented a “quick freeze” machine and started his own seafood company. The result? An entire frozen foods industry was born.
• In the quote, “If I had 8 hours to chop down a tree, I would spend 6 hours sharpening my axe,” Abraham Lincoln was thinking as an entrepreneur when he creatively combined the natural resource of the tree (land), his time to cut it down, the physical capital of the axe, and his knowledge of tree cutting, to decide to allocate the scarce resource of time into sharpening the axe well before engaging the endeavor. * Decisions….Decisions
• Economic Perspectives • So, what the heck is Economics?!?
• Economics is at its core a science dedicated to solving the problem of scarcity.
• The formal definition of what economics is can be summed up as follows;
“Economics is a social science that studies the choices that individuals, businesses, and governments, and even entire societies make as they cope with scarcity, and the possible alternative uses of limited resources.”
• This means, that as an empirical science, Economics attempts to understand how human progress is made through the choices between the alternative uses of the factors of production
• When we changed land use from ownership by a warrior elite to individual ownership, and when human labor was redirected from agricultural to industrial, and capital was directed from the education of an aristocratic elite to a merchant class, human history changed from the traditional village lifestyle to the modern urban one. * Decisions….Decisions
• Economic Perspectives • Economics is a study of how best to allocate scarce resources. It is a science dedicated to determining what ways are more efficient, what will produce the most benefit for the cost, and what the costs and benefits actually are.
• As an empirical science, it aggressively uses quantitative evidence (numbers) to judge the best ways in which to allocate these resources.
• As a result, Economics does not just tell us how people have historically made choices, but also what may be the best means in which to do so.
• This makes Economics not just an empirical science, but also a moral and philosophical science that, as well as explaining, attempts to guide and direct people into what the science says is the best use of the scarce resources available.
• The empiricist, and moral philosopher, who first developed the science of Economics was a Scottish philosopher named Adam Smith, and he detailed the science in a book printed in 1776 titled The Wealth of Nations. * Decisions….Decisions
• Mr. Invisible
• It was Adam Smith in this book who first identified land, labor and capital as the factors of production that generate a nation’s wealth.
• Prior to Smith, most financial minds believed in a system called mercantilism, which is an economic system developed during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion (gold and silver), a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies.
• It was to the ends of mercantilism that the British colonized, and then attempted to heavily regulate the trade of the American colonies, against which they successfully rebelled. * Decisions….Decisions
• Mr. Invisible
• Essentially, mercantilists believed that a nation’s wealth came from having multiple exports, no imports, and a mass supply of gold and silver to back up their currency.
• Hence, when the American colonies were importing Dutch tea, because it was cheaper, and invested heavily in land and bank notes as currency because gold and silver were in short supply in America as British treasuries were hoarding it there, the English were very concerned.
• Adam Smith, though his philosophy backed up the American Revolution, but did not heavily influence it given his timing in publishing The Wealth of Nations (1776), argued that the mercantilists were wrong.
• He argued that it was not gold and silver that determined the wealth of a nation, but its ability to produce goods and services that could be traded and would therefore expand wealth, rather than keeping it static based on set standards.
• He also convincingly demonstrated that having no imports and mass exports was an incorrect manner of allocating resources, because of two principles. One was that the cost of exporting could pay for imports, and thus a balance of trade was better for the second principle. * Decisions….Decisions
• Mr. Invisible
• The second principle is that nations grow wealthier only through the specialization and division of labor. He made the example of workers whom he had studied in the straight pin industry, and their productivity.
• When each worker performed every step of the process in making a straight pin themselves, they achieved very low output of approximately 20 pins a day.
• However, if the process were divided into eighteen different steps, wherein each step was handled by a different worker, output increased to 4800 pins a day.
• This specialized division of labor, however, depends on what Smith referred to as the extent of the market and the accumulation of capital.
• It also depends on the comparative advantage of the nation, business, or individual.
* Decisions….Decisions
• Comparative advantage can be defined as the ability of a nation, • Mr. Invisible group, or individual to provide a good or service at a lower cost than another.
• The extent of the market refers to the principle that the larger the market, the greater volume that can be sold, and the greater opportunity for the division of labor.
• Therefore, in order to have a large market you needed to export, but in order to benefit from the division of labor on a larger scale, you also needed to import.
• The next half of his theory was the basis for the economic system of capitalism, and will be discussed in detail when we get into economic systems.
• Suffice it to say though, that from Adam Smith we can begin to see how the field of Economics developed, and why we can say it ranges from mathematical modeling of predictions for the future to an understanding of and establishment of deciding what should morality be, and how to encourage people to make the moral choice. And, as a result, why economists aggressively use numbers to understand and manipulate CHOICE.