This document provides an introduction to economics and outlines key concepts. It discusses [1] how economics studies how society allocates scarce resources and can be divided into microeconomics and macroeconomics. [2] It then defines the four factors of production as land, labor, capital, and entrepreneurial ability. [3] Finally, it lists and explains the ten principles of economics, including that people face tradeoffs, respond to incentives, and that societies experience a short-run tradeoff between inflation and unemployment.
This document provides an introduction to economics and outlines key concepts. It discusses [1] how economics studies how society allocates scarce resources and can be divided into microeconomics and macroeconomics. [2] It then defines the four factors of production as land, labor, capital, and entrepreneurial ability. [3] Finally, it lists and explains the ten principles of economics, including that people face tradeoffs, respond to incentives, and that societies experience a short-run tradeoff between inflation and unemployment.
This document provides an introduction to economics and outlines key concepts. It discusses [1] how economics studies how society allocates scarce resources and can be divided into microeconomics and macroeconomics. [2] It then defines the four factors of production as land, labor, capital, and entrepreneurial ability. [3] Finally, it lists and explains the ten principles of economics, including that people face tradeoffs, respond to incentives, and that societies experience a short-run tradeoff between inflation and unemployment.
This document provides an introduction to economics and outlines key concepts. It discusses [1] how economics studies how society allocates scarce resources and can be divided into microeconomics and macroeconomics. [2] It then defines the four factors of production as land, labor, capital, and entrepreneurial ability. [3] Finally, it lists and explains the ten principles of economics, including that people face tradeoffs, respond to incentives, and that societies experience a short-run tradeoff between inflation and unemployment.
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Module 3
lesson 1 : introduction and Ten Principles of Economics
Objectives: Upon successful completion of this lesson, the student will be able to: Define what economics . Illustrate the factors of production. Analyze the ten principles of economics. Appreciate the importance of economics in their daily living. Economics is the study of how society allocates scarce resources to produce the products and services most desired by that society. Economics can be subdivided into microeconomics and macroeconomics. Microeconomics is the study of individual households and firms: how they spend their money, how they set prices, and how they invest. Individuals maximize their utility, while firms maximize their profit. Macroeconomics is the study of the cumulative effect of these households and firms acting in aggregate, and, in turn, how these cumulative effects affect individual households and firms. The major components of macroeconomics include the gross domestic product (GDP), economic output, employment, and inflation. Wants vs. Needs Two people could argue for hours about whether a given product or service is a need. Obviously, circumstance and frames of reference are important in this discussion. What one person needs, another person wants. Also, there are a variety of ways to meet a need or a want. For example, we all need to eat. But does that mean we need to eat a filet mignon with fresh steamed vegetables and a nice glass of white wine? While at first glance it's easy to assume the difference between wants and needs, when you really start getting into it, the differences can be difficult to articulate. Quite simply, the economic definition of a need is something needed to survive. In economics, the idea of survival is real, meaning someone would die without their needs being met. This includes things like food, water, and shelter. A want, in economics, is one step up in the order from needs and is simply something that people desire to have, that they may, or may not, be able to obtain. Again, with those two simple definitions, it doesn't seem like there should be much to talk about, but there is. Economics deals with how we allocate scarce resources, and those scarce resources may be needed to meet someone people's needs and other people's wants. So, we do need to talk about wants and needs.
The distinction between needs and wants, however, is not strictly fixed. The wants of today may become the needs of tomorrow. It is also important to understand that each person has different needs and wants which keep on changing. There is always something new that will come out in the market Society’s Economic Resources (Factors of Production) Every society – developed or developing, tiny or large – needs four economic resources, referred to as “the factors of production” to produce needed goods and services. Economists have put these resources into the following four categories.
Land: It includes all natural resources used in the production of goods and services. Any resources that are gifts of the nature rather than creations of human beings, which can be used in the production process, fall in this category; for example, unimproved land, forests, minerals, oil deposits, coal, iron ore, water, etc. The return earned by land owners is referred to as “rent.”
Labor: This category of resources includes physical and mental talents of
individuals. It is the work and time employees put in the production process. Employees working in a factory, a store, or a college all supply labor. Those who supply labor earn “wages and salaries”. Capital: Economists include all man-made goods used to produce other goods and services in this category of resources. Capital includes plant (e.g. factory buildings, warehouses, shopping malls, roads and highways, distribution facilities, etc.), machinery, and tools and equipment's. Although, in the vernacular, capital is usually referred to as money, economists do not consider money as capital as it does not produce goods or services. Money is only a medium of exchange that can be used to purchase capital goods. The return received by the owners of capital is called “interest.”
Entrepreneurial Ability: Land, labor, and capital, all by themselves, produce nothing, unless they are assembled and put in the production process. Therefore, a society needs someone, with special talents, who would start a business, bring all needed resources together, and take risks with their own money. Many entrepreneurs have also contributed to the societies as innovators. Innovation includes developing new products, new production techniques, or new ways of doing business. Behind the success of many big businesses are the abilities of their creators to innovate things with new ideas Ten Principles of Economics 1.People Face Tradeoffs • To get one thing, we usually have to give up something else. • Ex. Leisure time vs. work
2. The Cost of Something is What You Give Up to Get It
• Opportunity cost is the second best alternative foregone. • Ex. The opportunity cost of going to college is the money you could have earned if you used that time to work.
3. Rational People Think at the Margin
• Marginal changes are small, incremental changes to an existing plan of action • Ex. Deciding to produce one more pencil or not • People will only take action of the marginal benefit exceed the marginal cost
4. People Respond to Incentives
• Incentive is something that causes a person to act. Because people use cost and benefit analysis, they also respond to incentives • Ex. Higher taxes on cigarettes to prevent smoking 5. Trade Can Make Everyone Better Off • Trade allows countries to specialize according to their comparative advantages and to enjoy a greater variety of goods and services
6. Markets Are Usually a Good Way to Organize Economic Activity
• Adam Smith made the observation that when households and firms interact in markets guided by the invisible hand, they will produce the most surpluses for the economy
7. Governments Can Sometimes Improve Economic Outcomes
• Market failures occur when the market fails to allocate resources efficiently. Governments can step in and intervene in order to promote efficiency and equity.
8. The Standard of Living Depends on a Country's Production
• The more goods and services produced in a country, the higher the standard of living. As people consume a larger quantity of goods and services, their standard of living will increase 9. Prices Rise When the Government Prints Too Much Money
• When too much money is floating in the economy, there will be higher demand for goods and services. This will cause firms to increase their price in the long run causing inflation.
10.Society Faces a Short-Run Tradeoff Between Inflation and Unemployment
•In the short run, when prices increase, suppliers will want to increase their production of goods and services. In order to achieve this, they need to hire more workers to produce those goods and services. More hiring means lower unemployment while there is still inflation. However, this is not the case in the long-run. THANKS!
