Economic Notes 1
TINSTAAFL - Their Is No Such Thing As A Free Lunch
Fundamental Economic Problem is Scarcity
Scarcity - When scarce resources meet unlimited wants.
Economics - how people satisfy unlimited and competing wants with scarce resources.
Factors of Production Productive Resources: 4
Land - Gifts of Nature - Natural Resources - cattle, sunshine, forests, trees crops (not produced by man)
Labor - People - Varies in size, human, abilities & efforts.
Entrepreneurs - risk takers seeking profit. (special management people with initiative)
Capital - Tools, equipment, factories used in the production of goods. Capital Goods & Financial Capital
The Basic Economic Questions: — What to Produce — How to Produce — For Whom to Produce
ECONOMICS
Description - description of economic activity
Analysis: - Analysis of economic activity
Explanation - Explanation of economic activity
Prediction - Prediction of likely consequences
TRADE OFF & OPPORTUNITY COSTS
TRADE OFF - alternatives that must be given up when one makes choices.
Opportunity Cost - The cost of the next best alternative use of money, time or resources
Production possibilities Frontier - diagram of maximum combinations goods/services and economy can produce when all resources are fully employed. Relate to Opportunity Cost
BASIC ECONOMIC CONCEPTS
Need - Basic requirement for survival -
BASIC NEEDS - Food, Shelter Clothing
HIGHER NEEDS - communication, acceptance, knowledge accomplishment, etc.
Want - Way of expressing needs. Want is very broad way of expressing a need.
Free Product - any plentiful and abundant product not scarce enough to be a major concern in economics, Sunshine, rain, snow, etc.
Economic Product - Goods/service that is (3) useful, scarce and transferable to others.
Good - Tangible commodity. (5) useful, scare, transferable, and satisfies wants and needs.
Consumer Good - intended for final use by consumers (rather than business).
Capital Good - tool or equipment used to produce other goods or services. (Factor of Production)
Durable Good - Anything lasting > 3 years. Computer, car, equipment (Capital or consumer)
Non-Durable Good - Anything that lasts < than 3 years. Food, clothing, (Fruit Cakes?)
Services - Intangible commodity - Work that is performed for someone. Teaching, acting, accounting
Consumers - people who use goods and services to satisfy wants & needs
Consumption - using goods and services to satisfy wants and needs.
Conspicuous consumption - using expensive goods or service to impress others.
VALUE, UTILITY & WEALTH
Value - Worth of good or service as determine by market forces.
Paradox of Value - Diamond/water. The most important things in life are free. Contradiction between the low value of essentials and high value of non-essentials.
Utility - The capacity (good or service) to be useful to someone and/or give satisfaction to someone.
Wealth - Sum of economic goods that are tangible, (3) scarce, useful and transferable. Goods are wealth, service are not because services cannot be measured.
Production - The process of creating goods & Services - Land, Labor, entrepreneurship & Capital are required
Productivity - Efficient use of Productive resources. Usually labor but applies to all factors of production. Productivity is a key issue. Most efficient means. The lowest cost means or methods of production.
Specialization of Labor - Inputs do whatever they are able to do best.
Division of Labor - Workers who perform fewer tasks more frequently become faster.
Human Capital - Productivity tends to increase when firm invest in human capital. Sum of (4) skills, abilities, health and motivation of people. Investments in government in training, health care, employee motivation tend to increase the amount of production that takes place with a given amount of labor.
Economic Interdependence - action in one place have an economic impact in another part of the world.
MARKET - Anyplace where there are buyers and sellers. Economic Product.
Factor Market - Where productive resources are bought and sold. land, labor, financial capital
Product market - When goods and services are for sale.
Free Enterprise Market - Consumers and privately owned business make the majority of the economic decisions. government not involved.
Private Enterprise Economy. Market economy in which privately owned businesses have the freedom to operate for a profit with limited government intervention. Same as Free Enterprise Economy
Adam Smith (1723-1790) - Wealth of Nations, 1776 - An Inquiry into the Nature and Causes of the Wealth of Nations. Recognized as the first book to describe the basic principles of economics. Division & Specialization of Labor. Each worker become more productive as each becomes more skilled at a single job. Identified Competition and the Free Market System. Described the Invisible Hand that guides resources to their most productive use. Individuals acting in their own self interest (without any government intervention) would bring about the greatest good for society as a whole. The doctrine of laissez-faire (no government intervention in economic affairs) became a popular philosophy because of Adam Smith.
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January 20 1998