Chapter 1

What Is Economics?

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Section 1: An Economic Way of

Thinking

• We all need things and want things. How

do we decide what we actually get?

• The study of the choices that people make

to satisfy their needs and wants is called

economics

• A person who studies the economic

choices we make is an economist

Macro / Micro: How do I know?

• If you are looking under a microscope is

the object your looking at large or small?

• Microeconomics is the study of how small

economic actors make choices

– Individuals (like you and me)

– Households

– Companies, either big or small

– Individual markets (grocery prices in SA)

Macro / Micro: How do I know?

• The macro prefix means big therefore….

• Macroeconomics is the study of the behaviors of

entire economies

• Macroeconomic studies would include things

like….

– Employment/unemployment

– National health insurance

– Money policies directed by the Federal Reserve

• Manipulating interest rates

– Taxes at the national level

An Economic Way of Thinking

• You make economic decisions every day.

You just might not think of it in that way.

• Where or what to eat…

• Do I buy that shirt or go eat out with my

friends…

• Am I doing now what I need to be doing to

reach my educational goals…

Are you a little “nosey”?

• We already know that economists study the choices people make

• It’s a little like peeking through the economic window at our friends and neighbors and observing how and what they do as they go about making decisions

• Are you addicted to….– “What Not to Wear”

– “House Hunters”

• You may be studying economics……………….

I Am Making Decisions….So Are You

• Clothes that I buy…

• The car I drive…

• The food that I eat…

• The kinds of entertainment I seek…

• We call the people who decide to buy

things consumers

Who makes all that stuff we buy

anyway?

• The people who make things are called

producers

• They satisfy our needs and wants

• Producers don’t make things for us just

because we are “nice guys”

• They have studied us….they make these

things because they want our money!

Here we go….I want this, I need

that……

• You and I make decisions based on our

needs and wants….What’s the difference?

• Economists generally classify needs as

those things that are necessary for

survival

• These are basics

• Food, Clothing, Shelter, Air, Water

• Is that all there is?

Basics, who wants that! Give me

more!

• When we get past our basic needs we get

to the good stuff

• Wants are those goods and services that

people consume beyond what is

necessary for survival

• Homes, cars, designer clothes, ipods,

movies, pizza night, sporting events…

What kind of weirdo studies

economics?

• In 1960 a young British man was accepted

into the prestigious London School of

Economics

• He lived at home and commuted to school

each day by train

• One day as he waited he met another young

man he knew from his childhood who shared

a common love…..music

• That day Mick Jaeger met his friend Keith

Richards……..

The Rolling Who?

• Lyrics from a hit song written and sung by

Mick……..

• You can’t always get what you want

• You can’t always get what you want

• You can’t always get what you want

• But if you try sometimes, you might find

• You get what you need…

• (no doubt influenced by his economic

background)

What do we want? What do we

need?

• The answer to those questions focus on

two things, goods and services

• Goods are physical objects that can be

purchased……clothing, cars, pizza, shoes

• Services are actions or activities that are

performed for a fee by a …….plumber,

lawyer, hairdresser, cook, …….you get the

picture……

• Both goods and services can also be

referred to as products….

Use me, please!

• Anything that we use to produce goods

and services is called a resource….

• They are utilized to make or obtain what

you and I need or what we want….

• Resources that can be used to produce

goods and services are called “factors of

production”

• There are 4 factors of production

Four Factors of Production

• Natural resources

• Human resources

• Capital resources

• Entrepreneurship

What are Natural Resources

• Natural Resources are items provided by

nature that can be used to produce goods

or services

• They are found on or in the earth or in the

earth’s atmosphere

• Iron ore, coal, farmland, rivers, sunlight,

water……

• Some of these things are valuable

because they are scarce or available in

limited quantities…..

What are Human Resources?

• Human Resources are efforts exerted by

humans during the production process

• This can be either physical efforts or

intellectual efforts

• Assembly line workers, mechanics,

lawyers, scientists…….

What are Capital Resources?

• Capital Resources are manufactured

materials used to create other products….

• They are also referred to as Capital Goods

• Money used to purchase capital goods is

considered to be a capital good too

• A few examples are buildings, machinery,

tools, computers, factories, stores, dams,

hammers……

More on Capital Goods…

• These are also previously manufactured

products that have been put to use to

produce other finished goods or provide

services that you and I spend our money

on…

• The things that capital goods help to

produce are called consumer goods…

Some goods can be both….

• A bicycle purchased for personal use is

considered to be a consumer good

• The same bicycle purchased and use by a

New York City messenger service would

be considered to be a capital good…

Better ways of doing things…

• Technology is the use of technical

knowledge and methods to create new

products or make existing products more

efficiently

• Computer directed productions, robots,

automated assembly lines in plants…..

Could you be an Entrepreneur?

• The combination of organizational abilities

and risk taking involved in starting a new

business or introducing a new product is

called entrepreneurship.

• Entrepreneurs develop a new mix of the

factors of production to create something

of value

• Entrepreneurs are motivated by the

possibility of financial gain but risk

financial failure

Let’s list some entrepreneurs…

• Who are some local San Antonio

entrepreneurs?

• Red McCombs, Ernesto Ancira, Charles

Butt, Kit Goldsbury, Tom Benson, Weston

Ashton

Let’s list some entrepreneurs…

• Who are some Texas entrepreneurs?

• Michael Dell, Jerry Jones, Mary Kay Ash,

Herb Kellerer, Ross Perot

Let’s list some entrepreneurs…

• Who are some American entrepreneurs?

• Bill Gates, Jeff Bezos, Warren Buffet,

Mark Zuckerburg, Larry Page, Oprah

Winfrey, Martha Stewart

Let’s list some entrepreneurs…

• Who are some entrepreneurs from the

past?

• Thomas Edison, Henry Ford, John D.

Rockefeller, Ben Franklin, Milton Hershey,

Harland Sanders, Sam Walton, Walt

Disney, Steve Jobs, Ray Kroc

Section 2: Scarcity and Choice

• We are forced to make economic

decisions because we as individuals have

a limited amount of money….

• OK, some people are more limited than

others……..

• We have to choose how we spend our

limited amount of money. Choices,

choices, choices!

Why do we have to choose?

• Resources are limited

• Wants are unlimited

• This combination creates a condition

called scarcity

• Scarcity is the most basic problem of

economics because it forces everyone to

make choices

Why can’t we have lots of

everything?

• We can’t control everything…..

• Lack of rain can cause loss of crops

causing food shortages….

• Extreme cold weather can cause certain

crops like coffee, oranges, peaches to be

in short supply

• Storms, hurricanes, fires, etc. can destroy

crops, factories, equipment

What, How, Who…..

• Because of scarcity, we must make

decisions as to how to allocate resources

• To allocate means to distribute limited

resources to satisfy the greatest number of

needs and wants

3 Basic Economic Questions….

• What to produce?

• How to produce?

• For whom to produce?

• Does everyone always agree on the

answers to these questions? Why or why

not?

What to produce?

• This is answered in a way to meet the

needs and wants of society in the most

efficient way

• What mix of goods, services, etc. best

answers current needs

• Must take into consideration the limited

resources available

• In some societies some of these questions

are answered through the political system

How to Produce

• Nearly identical goods and services can

be produced by using different mixes of

the factors of production

• Natural, Human, Capital

Mix up the factors of production?

• Let’s build a road….

For whom do we produce…

• This is a societal problem

• How do we distribute goods and services

being produced.

• Does everyone share equally or do we

concentrate on smaller segments of the

society?

• Sometimes this question is answered by

the political system in place

Productivity is important

• Once we determine what and for whom we are going to produce we must deal with the ongoing problem of scarcity

• Our goal is to get the largest amount of output of goods and services while using the least amount of inputs

• We study productivity when we study the level of output that results from a given level of inputs

How can I improve efficiency?

• One way might be to assign a small number of tasks to each worker so they can become better and work faster at each task. This is called a division of labor.

• The focus on one activity is known as specilization.

• Henry Ford invented the assembly line to produce his automobiles

• We might also find shortcuts to speed up the production process

• How about replacing some human inputs with machines that can work faster, longer. This is called mechanization.

Let’s build something….

• Increase the productivity of a factory using our classroom as the factory location

• Think of ways to increase the productivity of our factory

• Can it be done?

• We need to improve our efficiency to get the job done

• Efficiency means using the smallest amount of resources to maximize the greatest amount of output

Section 3: Opportunity Costs

• As individuals we have learned that we

must make choices

• Society makes choices too based on how

it answers the 3 economic questions…

• What, How, For Whom

I can’t have it all. What do I do?

• My choices are limited sometimes

because….

• My available funds are limited….

• The goods or services I want are scarse…

Why must I sacrifice?

• Because funds are limited or goods and

services are scare we are often forced to

sacrifice one thing for another.

• When one good is sacrificed for another,

we are said to have made a trade-off

• When we chose something, the value of

the good/service that we did not choose

(the next best alternative) is called an

opportunity cost.

Trade-Offs

• In our personal life we face choices

everyday. Taking into consideration our

available money we chose from a set of

activities/products/services.

Opportunity Costs

• When we finally make our best choice,

what would have been our second choice

then becomes the Opportunity Cost. (The

next best alternative)

Production Possibilities Curve

• Trade-Offs and Opportunity Costs can be

illustrated in graphic form

• The graph illustrates all of the combinations of

TWO goods or services that can be produced in

a stated time frame

• The graph assumes two other criteria

– Available technology does not change

– All human, natural, & capital resources remain the

same

Let’s look at a Production

Possibilities Curve

• This shows all

combinations of the

production of two

products (luxury cars

& economy cars) that

can be made with the

current factors of

production in a set

time frame

Let’s look at a Production

Possibilities Curve

• Any point that is on

the curve represents a

“possibility”

• Point G represents an

under utilization or

inefficient use of the

factors of production

• Point F represents an

impossibility

Opportunity Costs Illustrated

• Point E illustrates

where ALL resources

are devoted to

produce economy

cars

• Point A illustrates

where ALL resources

are devoted to

produce luxury cars

Opportunity Costs Illustrated

• Note that to produce

more luxury cars you

must produce less

economy cars

• To produce more

economy cars you

must produce less

luxury cars

• That’s the Trade-off

Shifting Production Possibilities

Curve (The Future)

• Improvements in

technology and or

increasing inputs of

the factors of

production will cause

a shift to the right of

the curve at all points

• The shaded area

represents expanded

production

Shifting Production Possibilities

Curve (The Future)

• It is possible for the

curve to shift to the

left or down at all

levels

• This might be caused

by such things as

resources not being

available (shortages)

Section 4: Exchange

• Producers and consumers communicate

information about goods and services

through a process called exchange.

• This communication takes place when

producers and consumers agree to

provide one type of item for another item.

• --3 forms of exchange: barter, money,

credit

Forms of Exchange-Barter

• Today and in the past, people exchange

one set of goods for another set of goods

• This is a direct trade called barter

• Barter relies on bargaining and can

sometimes be complicated depending on

our understanding of the value of things

Forms of Exchange-Money

• Money is any item that is readily accepted

by people in return for goods and services

• Money has 3 functions

• --It is a standardized item readily accepted

• --It is a measure of value easily

understood by buyers and sellers

• --It has a stored value that can be spent

now or saved and used later

Forms of Exchange-Credit

• Credit allows consumers to use an item

before completing payment for it

• It allows consumers to pay for an item

over a period of time

• Failure to pay for the item as agreed might

mean that the item will have to be returned

to the seller (repossession, foreclosure,

voluntary return) and/or it could also cause

the risk of losing future opportunities to

receive credit again

Value

• Value is the relative worth of an item when

it is involved in an exchange

• It is usually expressed as an amount of

money, also called the price

• The value or price of a good or service

usually reflects its availability

• Is it abundant or rare?

Utility

• The usefulness to a person of a good or

service is said to be it’s utility.

• Utility is sometimes hard to access

because each individual must determine

that themselves

• One person might find something useful

while another person might find the same

thing of no use at all

Characteristics of Exchanges

• In order for exchanges to take place both

parties in the exchange must provide

goods and services that the other party

wants

• For an exchange to take place both parties

to the exchange must be satisfied with the

good/service of the other party

• Each party needs to feel like he got the

better deal

Self-sufficiency

• Self-sufficiency is when you can provide

all of your own wants and needs without

any outside assistance

• This is rare and almost an impossibility

• Would require too many skills, tools,

equipment, raw materials, and knowledges

Interdependence

• Interdependence means that events or

developments in one region (or part of the

world) influences other regions

• Homebuilding in SA / Logging in Idaho

• Interdependence can have political

consequences and cause some areas to

become economically vulnerable

References

• Economics: Texas Edition: 2016. McGraw Hill Education

• Holt Economics; Texas Edition: 2003, Holt, Rinehart and

Winston