The Basic Problem in Economics
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Economics – the study of how individuals and societies
make choices about ways to use scarce resources to
fulfill their unlimited needs and wants
Everything other than a basic survival need is
considered a want by economists
Scarcity – people do not and cannot have enough
income, time, and other resources to satisfy their every
want. Wants exceed what is available at any given time.
Shortage – temporary condition while scarcity always
exists
Factors of Production
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Factors of Production – resources of land, labor, capital
& entrepreneurship used to produce goods and services
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Land – natural resources and surface land and water
Labor – human effort directed toward producing goods and
services
Capital – previously manufactured goods used to make other
goods and services
Entrepreneurship – ability of risk taking individuals to
develop new products and start new businesses in order to
make profits
Technology – advance in knowledge leading to new and
improved goods and services and better ways of producing
them
Factors of Production
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Goods – tangible objects that can satisfy
people’s wants
Services – actions that can satisfy people’s wants
Productivity – the amount of output (goods and
services) that results from a given level of inputs
(land, labor and capital)
Trade-Offs
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Trade-Off – sacrificing one good or service to
purchase or produce another
Opportunity Cost – the value of the next best
alternative that had to be given up to do the
action that was chosen. Any time you pay
money to purchase a good or service, you lose
the opportunity to purchase your next best
alternative.
What Do Economists Do?
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Microeconomics – branch of economic theory
that deals with behavior and decision making by
small units such as individuals and firms
Macroeconomics – branch of economic theory
dealing with the economy as a whole and
decision making by large units such as
government.
What Do Economists Do?
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Economy – all the activity in a nation that together
affects the production, distribution, and use of goods
and services
Economic Models – a theory or simplified
representation that helps explain and predict economic
behavior in the real world
Models help economists use the scientific method in
predicting and solving real life scenarios
Economists try to avoid value judgments and only
inform of what possible outcomes may be.