what is economics?. definition: study of how individuals & societies make choices about ways to...
TRANSCRIPT
What is Economics?
• Definition: study of how individuals & societies make choices about ways to use scarce resources to fulfill their wants
Wants vs. Needs
• Wants: anything other than what is needed for basic survival
• Needs: things required for basic survival (Food, Clothing, Shelter)
Wants vs. Needs
• Example: In 1901, people discovered oil in Texas – but they were actually looking for water. Disappointed, they offered to trade the oil for water at a ratio of 1:1 (1 barrel of oil for each barrel of water).
Problem of Scarcity
• Scarcity is THE fundamental problem in economics
• Maintains that all resources are limited• People will compete for these limited
resources• Scarcity exists because people cannot satisfy
their every want
Factors of Production
• Definition: what goes into producing a product• 4 Factors of Production:1. Capital: previously manufactured goods used to
make other goods & services2. Entrepreneurship: ability of individuals to start
new businesses & develop new products; Risk-taker; lemonade stand example
3. Land: natural resources & surface land & water4. Labor: human effort directed toward production
3 Basic Questions???
1. What should be produced?– Always a Trade off– Ex. More $$$ on roads = less $$$ for salt in the winter
2. How should it be produced?– Always look for Profit Maximization– Ex. Jobs overseas, Pink slime
3. For whom should it be produced?– In the US we use a Price System– Can everyone afford a Ferrari?– NOT A CHANCE! Only high-rollers like Mr. Green
Supply & Demand
• Is what determines this price system• Demand: represents a consumer’s willingness
and ability to pay; how we define this is with...• Law of Demand: As price goes up, quantity
demanded goes down; as price goes down, quantity demanded goes up
Supply & Demand
• Factor effecting quantity demanded of a product:– Real Income: people are limited by income as to what
they can buy; only a few that can afford a Ferrari– Substitution Effect: people can replace one product
with another if it satisfies the same need– Diminishing Marginal Utility: how one’s additional
satisfaction for a product lessens with each additional use/purchase of it
Supply & Demand
• Supply: willingness and ability of producers to provide goods and services
• Law of Supply: As prices increase, the quantity supplied increases, as prices decrease, the quantity supplied decreases
Supply & Demand
• Factors Determining Supply: • Price of Inputs: how much it costs to produce
the product• Number of firms in the industry: competition;
more = more supply; less = less supply• Taxes: increase = reduction of supply (not
making as much money off product)• Technology: increase can reduce cost of
production and increase supply
Putting Supply & Demand Together
• Equilibrium Price: point at which quantity demanded & quantity supplied meet
• Shortage: causes prices to rise, while a Surplus causes prices to drop…Why???
• Price Ceiling: prevents prices from going above a specified amount; Ex. Rent in NYC
• Price Floor: prevents prices from dropping too low; Ex. Minimum wage