Fundamental Economics: Basic Concepts

Class Notes Fundamental Economics: Basic Concepts

What is ECONOMICS?  The study of how people try to satisfy what appears to be seemingly ______and ______wants through careful use of relatively ______resources

Four Key Elements of Economic Study o Description . Examples of DESCRIPTION in economic Study: ______($ value of all final goods and services produced within a country), ______numbers, ______, interactional trade, interaction of business and labor, effects government ______and ______. . It’s important to use description in economic study because we need to know what the world around us looks like o Analysis . answers the “______” and “______” questions . It’s important to use analysis in economic study because it helps us deal with problems we want to solve o Explanation . the communication of the “whys” and “hows” by economists o Prediction . economics deals with the study of what is or what tends to be, so it can help predict what may happen in the future, as well as likely consequences of different courses of action

Needs vs. Wants

 Needs =

 Wants =

 TINSTAAFL =

Scarcity  Individuals have ______ The total resources of society are ______ Therefore ______exists.  As a result, it isn't possible for everyone to have everything he or she wants.

What is Scarcity?  the ______that exists because human ______exceed the ______of available ______to satisfy those wants  a situation in which a ______has more than one valuable ______Basic Economic Questions  Because we live in a world of unlimited wants and limited resources (leading to scarcity), we have to make wise economic decisions.  To do this, we have to make decisions based on three basic economic questions: 1.

Productive Resources (AKA: Factors of Production)  Natural (______) - gifts of ______such as oil, iron ore, forests and water  Human (______) - Labor is more than the number of people ______and ______to work, it also reflects the abilities of people and includes people's ______, ______, ______, ______and ______.  Capital Goods (______) - goods and services such as ______, ______, roads, dams and machinery; the level of ______also influences capital  Entrepreneurship - a special kind of ______that represents the ______of people who assume the ______of organizing land, labor and capital resources to produce goods and services

Basic Concepts Goods • an ______that is economically useful or satisfies an economic want Consumer Good • Products that are purchased for consumption by the average consumer. Alternatively called final goods Capital Good • Any tangible assets that an organization uses to produce goods or services such as office buildings, equipment and machinery.

Services • ______that is performed for ______

Consumers • a person who uses ______and ______to satisfy ______and ______

Value • refers to a ______that can be expressed in ______and ______

What is the “Paradox of Value”? • Note: A paradox is a situation, person or thing that combines contradictory features or qualities. • Some ______(like water) have little ______value, while non- ______(like diamonds) have a high ______value

Marginal Utility • the extra ______or ______a person gets from acquiring or using one or more ______of a ______

Principle of Diminishing Marginal Utility • states that the extra ______we get from using additional quantities of the product begins to ______that we’re not willing to pay as much for the 2nd, 3rd or 4th unit as we did the 1st because our ______has been ______

Wealth • the ______of those products that are ______, ______, ______and ______from one person to another

Opportunity Costs  What is it?

 What is it NOT?

 Why is it NOT MONEY? o it is whatever ______or ______you would have spent the money on as your next-favorite choice

Production Possibilities Curve (Frontier) • Illustrates the concept of ______. • It is a table or graph that shows the full ______capacity of an economy in the form of possible combinations of two ______, or two bundles of goods, that could be ______with a given amount of productive ______and level of ______. • Shows ______of goods and/or services that can be produced when ______productive resources are used

DRAW IT!! Reading the PPC  The line on the graph represents the full ______—the ______— when the economy ______all of these ______resources  Identifying possible ______allows an economy to examine how it can best put tis limited ______into ______ Considering different ways to fully employ its resources allows an economy to ______the ______of goods and services that leads to maximum ______ An economy pays a ______price if any of its resources are______: it cannot ______on its ______and it will ______to reach its full production ______ Economic growth made possible by more ______, a larger ______, or increase ______causes a ______frontier for the economy

The PPC Explained  A movement from Point B to Point C indicates that this society now prefers to build more consumer goods and less capital goods.  This movement from Point B to Point C shows the tradeoff involved in choosing a different combination of goods.  In order to gain more consumer goods this society is unable to consume as many capital goods.

Circular Flow Chart

Factor Market  The market where ______are ______and ______ You participate in the factor market every time you go to ______and ______your ______to your ______

Product Market  The market where ______sell their ______and ______ After individuals receive their ______from the ______they sell, they can ______it in the ______.  The ______individuals receive from ______the ______market returns to ______in the ______market and businesses then use that money to ______more ______and ______.

Specialization and Division of Labor Specialization  When ______focus on ______separate ______ A ______in which people ______a ______range of ______and ______than they ______ Specialization increases ______ it requires ______and increases ______

Within a company, for example, there are typically workers who specialize in buying supplies, different aspects of production, future planning, paying bills and taxes, collecting sales revenue, hiring and managing workers, and many other categories.

Division of Labor  An arrangement in which workers ______only one ______or a few steps in a larger ______(as when working on an as______)

Within the economy as a whole, the division of labor explains why even if you bake your own bread, you typically don't grow your own wheat, grind it into flour, build your own oven, make your own bread-pans and so on. Instead, people specialize in a few skills and then take the wages that they earn from those skills to purchase the other goods and services that they desire from other specialists.

 In this way, the division of labor and specialization is the ______for an ______to ______.

Adam Smith and The Wealth of Nations (1776) A radical new idea for 1776: the wealth of a nation should be defined as the sum of its labor-produced goods, not by who owned those goods.

Division of Labor  workers who ______on one ______become much ______at doing it  with ______, the time that it would take to switch between jobs is ______ Workers who specialize on one job often ______more ______ways or new machines for doing the job. Invisible Hand  Every individual “intends only his own ______, and he is in this… led by an ______... By pursuing his own ______he frequently ______that of ______…”  A ______isn’t ______, but that ______acts as an “invisible hand” that guides ______to their most ______use

Laissez Faire  French, literally means “______”  Refers to minimal ______interference in ______affairs

Note: Smith and later scholars focused on how the economy works best and most efficiently, but they did not consider what moral goals the economy should serve. Smith argued that the most efficient economy was a free-market economy, with little government interference. When Britain and other nations began to put Smith’s theories into practice, their economies expanded rapidly and vast wealth was created. Even though economics has changed greatly since his time, it is fair to say that we live in Adam Smith’s world. But as Adam Smith makes clear, specialization is possible only when people are able to coordinate their production and consumption decisions with each other. The study of economics is largely concerned with explaining how this coordination takes place.

Trade, Exchange, Interdependence  Most countries do not produce all of what they ______. Instead, they focus more heavily on producing certain ______and ______with other countries.

 Thus, the global economy is a ______of trade and ______.

 Trade— the voluntary ______of goods and services for ______or other ______and ______

 Interdependence—a situation in which ______made by one person affect decisions made by other ______, or it can also be events in one part of the world or sector of the economy affect other parts of the world or other sectors of the economy.

Note: People do not make everything that they and their family use: that is, they do not grow all their own food, sew their own clothes, build their own house and provide themselves personally with health care and education. Instead, people focus on a particular job and then use the wages that they earn from that job to purchase the goods and services they desire. In this way, an economy forms an interlinked network of trade, exchange and interdependence.