Economics : The Basics!Please take notes on the following slides

in your Business notebook

What is Economics? Economics-Social science which deals with scarce

resource allocation (use) for attaining: 1. society’s unlimited needs/ wants 2. greatest/ max. satisfaction for goods/ services

Foundation rests on 2 fundamental facts: 1. Resources = Limited 2. Scarcity-Needs/ wants for goods/ services are

unlimited but resources are limited! Scarcity = There are not enough goods to produce all

people’s wants (Not $ lack but resource lack) Most important fact of Econ!

3 Society Sectors

1. Consumer-Person who buys product Consumer goods (Durable/ Non-Durable)

2. Business-Capital goods (Machinery, tools, factories, etc.)

3. Government-Public goods (Parks, schools, highways, etc.)

Basic Terminology 1. Need-Necessity for life (Food, shelter, etc.) 2. Want-Anything for which is not need (Luxury) Note: Need and Want are UNLIMITED 3. Goods-Material (Clothing, automobile, food,

boat, etc.) 4. Service-Activity (Haircut, legal advice, taxi

ride, etc.) 5. Resources-(Factors/ Means of Production)

Inputs that go into goods/ services production Ex. Natural resources, labor, knowledge and capital Resources = LIMITED

4 Resource Categories

1. Land-(“Nature’s Gifts”) Anything given by Mother Nature that is used in goods/ services production Ex. Territory, Natural Resources (Oil, timber, iron ore,

water, etc.) 2. Labor-Man’s physical/ mental capabilities which

are used in goods/ services production 3. Capital-Anything manmade used in goods/ service

production Ex. Machinery, tools, factories, etc. Financial Capital-$ used to buy tools/ equipment used in

production 4. Entrepreneurial Ability-Combines land, labor,

capital into goods/ services production Entrepreneur-Innovator, risk taker, and/or manager

(Owner) looking to make profits

What’s the Goal of Economics? Answer: Use scarce resources efficiently in

effort to attain satisfaction for society’s unlimited needs, wants for goods/ services Do best w/ what you have People have unlimited needs and wants, and

using resources wisely to suit this issue Societies must economize

Economize-Gain society’s greatest satisfaction for needs/ wants through: a. Full Employment-All resources employed b. Full Production-Resources are assigned/

combined properly

What Must Societies Avoid? 1. Underemployment-All resources are

not employed in production 2. Underproduction-Resources are not

assigned/ combined properly Note: Again, goal of economizing is Full

Employment and Full Production!

2 Broad Areas of Study in Econ

1. Macroeconomics-Overall econ activity/ interaction between major economy sectors

2. Microeconomics-Individual unit’s activity in economy

vs.

3 Basic Questions of Econ 1. What to produce?

2. How to produce?

3. For whom to produce?

4 Steps of Scientific Method 1. Observe-Look at world around you 2. Hypothesis-Make educated guess

based on observation 3. Test Hypothesis-Set up experiment

to see if hypothesis is accurate or not Perform multiple times under similar

conditions to find cause and effect 4. Accept, Revise or Reject Hypothesis

Was your hypothesis right or wrong? Why?

Looking at the 2 Types of Tools of Economic Reasoning

1. Factual-Includes measurable units: a. Statistics b. History c. Institutions

2. Theoretical-Includes ideas: a. Concepts b. Models c. Variables

Factual Tools of Econ Reasoning 1. Statistics-2 types:

a. Data-Numbers used in Econ measurements Ex. Production, Prices, Interest Rates, etc. b. Methods to find data (Finding Average)

Necessary to fully understand situation to find best solution 2. History-Using knowledge gained from stories of past to

help influence present and future Ex. Developed Countries using harmful pesticides when they were

younger and less wealthy (Short term gain but long term damage Should Less Developed Countries do same?

3. Institutions-Decision making units, established practices/ laws and cultural behavior

Ex. Gov’t Policy, Internal Revenue Service, Military, Media, etc.

Theoretical Tools of Econ Reasoning 1. Concepts-Word/ Phrase expressing Econ idea 2. Models-Simplified representation of the real

world showing relationship between 2 or more variables Ex. Words, Math Formulas, Graphs, etc.

Variables-Quantity that changes due to changes in other related items Ex. Price of Tractor and Amount of People Buying

Tractor

Why Use Graphs?

Answer = Adds sense/ meaning to information If you can understand it, you are better

able to change it

Types of Graphs 1. Charts-Graph that represents data/

information visually A. Pie Chart- a circular chart showing percentages B. Time Series-Line graph showing changes in value

over time C. Column Chart-chart using columns to show value D. Bar Chart-Column chart turned sideways E. Area Chart- chart using area of space to represent

value 2. Diagrams-Visual graph/model that show

relationship between 2 or more variables May or may not have values that can actually be

measured

Pie Chart

Time Series

Column Chart

Bar Chart

Area Chart

Diagram

Direct & Inverse Relationships Direct-Variable Relationship where as

one’s value increase/ decrease so does the other (Same for Both)

Inverse-Variable relationship where as one’s value increases the other decreases (Opposite)

Free vs. Econ Goods

Free Good-Production/ consumption good that does not have direct cost

Economic Good-Any good/ service that sells for price (Not free)

What’s an Economist Do?: Econ Reasoning

1. Analysis-Through research assumes how people/ groups will behave Explain events

2. Predict outcomes of what will happen under different circumstances Ex. What will happen if people chose A over B?

3. Value Judgment- Which is best choice to make? Why? What’s more important, people or profits? Recommend policy

Any Questions?