Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

The term economics comes from the Ancient Greek (oikonomia, "management of a household, administration") from (oikos, "house") + (nomos, "custom" or "law"), hence "rules of the house(hold)". Current economic models emerged from the broader field of political economy in the late 19th century. A primary stimulus for the development of modern economics was the desire to use an empirical approach

ECONOMICS
The study of how to meet unlimited wants and needs with limited resources.

There are different types of ECONOMIC RESOURCES

Natural
Gifts of nature sunlight, water, land, trees, etc. used to produce goods and services

Human
Physical and mental labor people use to produce goods and services

Capital
Buildings, machines, technology and tools used to produce goods and services

SCARCITY
TO COVER ALL YOUR

RESOURCES

NOT ENOUGH

WANTS AND NEEDS

And . . .
Each consequence is either a

cost or a benefit!

= What you must give up

COSTS

BENEFITS
= What you will receive

So now you have to decide . . .

How to best use your

resources
to meet your

wants and needs!

Unlimited wants and needs

+ =

Natural, Human, Capital, Financial

Limited resources

Scarcity
=

Choices
=

Consequences
=

Costs and Benefits

Common distinctions are drawn between various dimensions of economics. The primary textbook distinction is between microeconomics, which examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy.

In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defense, small-pox vaccinations, etc.) or private goods (new computers, bananas, etc.), and "guns" vs. "butter". Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice.".[11] The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit (utility).

The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S). Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting power. For a given market of a commodity, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is 'constrained utility maximization' (with income and wealth as the constraints on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred.

Supply is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be profit-maximizers, meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a directly-proportional relation between price and quantity supplied (other things unchanged). That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement.

Externalities occur where there are significant social costs or benefits from production or consumption that are not reflected in market prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the price distortions caused by these externalities. Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of equilibrium due to a shift in demand or supply.

Adam Smith wrote The Wealth of Nations Smith discusses the benefits of the specialization by division of labour. His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the functions of firm and industry" and a "fundamental principle of economic organization."To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource-allocation theory that, under competition, owners of resources (labor, land, and capital) will use them most profitably, resulting in an equal rate of return in equilibrium for all uses (adjusted for apparent differences arising from such factors as training and unemployment). In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace. He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole.

Malthus cautioned law makers on the effects of poverty reduction policies Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Human population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.

The Marxist school of economic thought comes from the work of German economist Karl Marx. Marxist (later, Marxian) economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx's major work, Das Kapital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital.[91] The labour theory of value held that the value of an exchanged commodity was determined by the labor that went into its production.

John Maynard Keynes (right), was a key theorist in economics. Keynesian economics derives from John Maynard Keynes, in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field. The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low " effective demand" and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis.

"Recession"

Economists commonly use the term "recession" to mean either a period of two successive calendar quarters each having negative growth of real gross domestic productthat is, of the total amount of goods and services produced within a countryor that provided by the National Bureau of Economic Research (NBER): "...a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (nonfarm payrolls), industrial production, and wholesale-retail sales." Almost all academics, economists, policy makers, and businesses eventually defer to the NBER's determination for the precise dates of a recession's beginning and end, which may only be announced after a substantial delay. In contrast, in non-expert, everyday usage, "recession" may refer to a period in which the unemployment rate is substantially higher than normal.

"Unemployed" Labor economists categorize people into three groups: "employed" - actually working at a job, even if part-time; "unemployed" - not working, but looking for work or awaiting a scheduled recall from a temporary layoff; and "not in the labor force" - neither working nor looking for work.People not in the labor force, even if they have given up looking for a job despite wanting one, are not considered unemployed. For this reason it is often thought, especially when a recession has persisted for a sustained period, that the unemployment rate understates the true amount of unemployment because some unemployment is disguised by discouraged workers having left the labor force. The everyday usage of the word "unemployed" is usually broad enough to include disguised unemployment, and may include people with no intention of finding a job. For example, a dictionary definition is: "not engaged in a gainful occupation", which is broader than the economic definition.

"Money" Economists use the word "money" to mean very liquid assets which are held at any moment in time.[3][6] The units of measurement are dollars or another currency, with no time dimension, so this is a stock variable. There are several technical definitions of what is included in "money", depending on how liquid a particular type of asset has to be in order to be included. Common measures include M1, M2, and M3. In everyday usage, "money" can refer to the very liquid assets included in the technical definition, but it usually refers to something much broader. When someone says "She has a lot of money," the intended meaning is almost certainly that she has a lot of what economists would call financial wealth, which includes not only the most liquid assets (which tend to pay low or zero returns), but also stocks, bonds and other financial investments not included in the technical definition. Non-financial assets, such as land and buildings, may also be included. For example, dictionary definitions of money include "wealth reckoned in terms of money" and "persons or interests possessing or controlling great wealth",[8] neither of which correspond to the economic definition.

"Investment" and "capital" While financial economists use the word "investment" to refer to the acquisition and holding of potentially income-generating forms of wealth such as stocks and bonds, macroeconomists usually use the word for the sum of fixed investmentthe purchasing of a certain amount of newly produced productive equipment, buildings or other productive physical assets per unit of timeand inventory investmentthe accumulation of inventories over time.[6] This is one of the major types of expenditure in an economy, the others being consumption expenditure, government expenditure, and expenditure on a country's export goods by people outside the country. The everyday usage of "investment" coincides with the one used by financial economists the acquisition and holding of potentially income-generating forms of wealth such as stocks and bonds. Similarly, while financial economists use the word "capital" to refer to funds used by entrepreneurs and businesses to buy what they need to make their products or to provide their services, macroeconomists and microeconomists use the term capital to mean productive equipment, buildings or other productive physical assets.

"Welfare economics" Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium, with a focus on economic efficiency and income distribution. In general usage, including by economists outside the above context, welfare refers to a form of transfer payment.

"Cost" The economics term cost, also known as economic cost or opportunity cost, refers to the potential gain that is lost by foregoing one opportunity in order to take advantage of another. The lost potential gain is the cost of the opportunity that is accepted. Sometimes this cost is explicit: for example, if a firm pays $100 for a machine, its cost is $100. Other times, however, the cost is implicit: for example, if a firm diverts resources from producing output worth $200 into producing a different kind of output, then regardless of how much or how little of the latter output is produced, the opportunity cost of doing so is $200. In accounting, there is a different technical concept of cost, which excludes implicit opportunity costs. In common usage, as in accounting usage, "cost" typically does not refer to implicit costs and instead only refers to direct monetary costs.

Demand In economics, demand refers to the strength of one or many consumers' willingness to purchase a good or goods at any in a range of prices. If, for example, a rise in income causes a consumer to be willing to purchase more of a good than before contingent on each possible price, economists say that the income rise has caused the consumer's demand for the good to rise. In contrast, if a change in market conditions leads to a decline in the price of a good resulting in a consumer's being willing to buy more of it, economists say that the consumer's quantity demanded of the good has risen. A change in quantity demanded is represented by a movement along the demand curve, while a change in demand is represented by a shift of the demand curve. In popular usage a change in "demand" can refer to either what economists call a change in demand or what economists call a change in quantity demanded.

Elasticity In general usage "elasticity" refers to flexibility. In economics it refers to a quantitative measurement of the degree of flexibility of something in response to something else. For example, the "elasticity of demand with respect to income" or the "income elasticity of demand" for a product refers to the percentage change in the quantity of the product demanded in response to a 1% change in consumers' income, or more generally to the ratio of the percentage change in quantity demanded to the percentage change in income. The change in the denominator always causes the change in the numerator, so the elasticity can be said to be the ratio of a percentage change that is caused to the percentage change of something that is causative.

What is Economics?
The study of how people allocate their limited resources to satisfy their unlimited wants. The study of how people make choices.

Why is it a Social Science?

It deals with the behavior of people as they cope with the fundamental problem of scarcity.

Factors of Production Provide the means for a society to produce and distribute goods and services.

Why is what we want scarce?

Scarcity: the fundamental economic problem facing all societies. Why does this condition arise? Wants > Resources Goods and services are scarce because the resources needed to produce them are scarce! Scarcity always exists!

Three Basic Economic Questions

1.What to produce? 2.How to produce? 3.For whom to produce?

3 Qs are answered in order to make decisions about the ways limited sources will be used.

Answering the 3 basic economic questions in a Market Economy [i.e., U.S.] What to produce?
What should we devote our resources to?

How to produce?
What methods should be used in production? What is most efficient?

For whom to produce?

Who can afford the product?

Trade-offs

Definition: alternative choices Choices must be made to satisfy our wants and needs (scarcity wants >
resources)

Each choice in a trade-off has advantages and disadvantages.

Examples
Some choices are easy to make
Hmm Should I have pizza or a hoagie for lunch today?

Other decisions are agonizing

Should I get out of bed and go to school today or should I sleep in?

Opportunity Cost
When comparing the top 2 choices, it is the BENEFIT of the next best alternative that must be sacrificed to satisfy a want.
Not all possible things given up.
The best thing we give up to get what we want.

Why it Matters
Understanding the opportunity costs of different choices in life makes you a better decision-maker! You always have to give something up

Visualizing the Relationship

ESSENTIAL QUESTION

How can we measure what we are gaining and losing when making choices?

Production Possibility Frontier [PPF]: Represents ALL combinations of total output that could be produced when By ALL resources are fully employed resources and used efficiently. , we mean Assumption:
1. Amount of available resources and technology will not change.
the 4 Factors of Production

Measuring Opportunity Cost Graphically Production Possibility Frontiers

Why is the PPF curve downward sloping?

Measuring Opportunity Cost Graphically Production Possibility Frontiers

Trade-offs
We are always making a choice and giving something up!

BOWED-OUT PPFs Varying O.C.

Principle of Increasing Costs: As a society produces more of one product, the O.C. of producing that product increases because we are using more resources that are poorly suited to produce it.

STRAIGHT-LINE PPFs
Food 4 3 2 1 1 2 3 4

Constant O.C.

O.C. between 1 and 2 computers = 1 food unit O.C. between 3 and 4 computers = 1 food unit

Computer

Constantly giving up the same quantity of food to get additional computers

Three Ways to Increase Productivity

1. Specialization Productive inputs specialize in the task they do best 2. Division of Labor Workers perform fewer tasks more frequently
PRACTICE MAKES PERFECT!

Three Ways to Increase Productivity

3. Investment in Human Capital
Sum of all skills, abilities, health, and motivation of people Examples training, healthcare, motivational programs It is what you would be left with
if someone stripped away all of your assets and left you on a street corner with only the clothes on your back

Economic Interdependence
What does interdependence mean? Economic Interdependence: the actions of one part of the country (world) has an impact on what happens elsewhere

Understanding how all parts fit together

Circular Flow of Economic Activity Represents a market economy
2 main markets Product Market: Factor Market: where goods and services where the 4 factors of are bought and sold production are bought/sold

Shows interdependence between businesses and individuals

Circular Flow of Economic Activity

Goods & Services Money

Product Market

Goods & Services Money

Business Firms
Money

Circular Flow of Economic Activity Factor Market

Individuals Households
Money

Factors of Production

Factors of Production

What is capitalism? A system in which private citizens own the factors of production What is competition? A struggle among sells to attract consumers while lowering costs

Exploring Isms: Capitalism