Introduction to Economics

• Economics comes from the Greek words "oikos" (household) and "nomus" (system or management).
• Oikonomia or Oikonomus refers to household management.
• Early Greek city-states (polis) had systems to manage provisions and sustain their communities.
• State management was a common practice, seen as management of the household.

Definitions of Economics

• Economics manages scarce resources.
• Economics is the study of how individuals make choices.
• Economics seeks to use available economic resources efficiently to fulfill society's unlimited demands.
• Economics is about scarcity and choice.
• Economics is a science, a system, and a process for allocating scarce resources for future generations.

Economics and Scarcity

• Economics is unnecessary if there is no scarcity.
• Humans have unlimited needs and wants, but resources are limited.
• Economics addresses scarcity through proper apportionment and distribution of resources.

Ceteris Paribus

• Ceteris paribus is a Latin term meaning "with all other things the same," "all else equal," or "all other things held constant."
• It is used to analyze variables by isolating them.
• It simplifies complex situations by comparing two variables while holding other factors constant.
• Economics isn't an exact science like math because it relies on human behavior.
• Ceteris paribus allows economists to make assumptions about variables.

Ceteris Paribus Examples

• If milk prices increase, ceteris paribus, people will buy less milk.
• The example only considers the cause (increased price) with one effect (decreased sales of milk).
• If minimum wage increases, ceteris paribus, unemployment rates will rise.
• The assumption is that employers can't afford to hire more employees.

Important Economic Concepts

• Wealth is anything with functional value that can be traded.
• Wealth is the stock of net assets owned by individuals or households.
• Physical and financial assets are easily converted into cash.
• Consumption is the direct usage of available goods and services.
• Consumers get satisfaction from using goods and services.
• Production is the creation of output by firms.
• Production combines land, labor, and capital.
• Exchange is the process of trading goods/services for money.
• Buying goods and services counts as exchange.
• Distribution allocates scarce resources to households, businesses, and the world.

Basic Economic Decision Problems

• Humans have unlimited needs and wants.
• There are many choices on what to purchase.
• Individuals and firms can buy publicly or privately provided goods/services.
• Firms determine consumer needs and decide what is most profitable.
• Producers allocate resources and match technologies for production.
• Firms decide whether to deliver goods from one market to another or remain in the same area.
• Business owners decide on transportation modes.
• Populations increase, driving expenses.
• Resources are divided according to the growing population's needs and wants.

The Concept of Opportunity Cost

• Economics measures the value of what is given up.
• Opportunity cost is the loss of the next best alternative.

Factors of Production: Land

• Land includes all natural resources not made by humans.
• Land includes materials available beneath or above the soil.
• Compensation for using land is called rent.

Factors of Production: Labor

• Labor is any form of human effort in production.
• Labor includes a wide range of skills, abilities, and characteristics.
• Reward for labor is wage or salary.

Factors of Production: Capital

• Capital is all goods made by humans used in production.
• This includes buildings, machinery, furniture, and fixtures.
• Reduction of productive capacity of capital leads to depreciation.
• Interest is then paid for the depreciation.

Factors of Production: Entrepreneurship

• Entrepreneurship is human effort in production that is characterized by planning, organizing, managing, evaluating, and risk-taking.
• Profit or loss is a monetary gain.

Circular Flow Diagram

• The economy consists of people buying, selling, working, hiring, and manufacturing.
• The circular flow diagram simplifies the economy.
• The economy has two decision-makers: households and firms.
• Firms produce goods and services using inputs (labor, land, and capital).
• These inputs are the factors of production.
• Households own the factors of production and consume goods/services.
• Households and firms interact in two types of markets.

Circular Flow Diagram: Implication

• Households are buyers and firms are sellers in the markets for goods and services.
• In the markets for the factors of production, households are sellers and firms are buyers.
• Households provide the inputs that firms use (labor, land, and capital).
• The circular flow diagram organizes economic transactions.

Circular Flow Diagram: The Flows

• The inner loop represents the flows of goods and services between households and firms.
• Households sell the use of their labor, land, and capital to firms.
• Firms use these factors to produce goods and services, which are sold to households.
• The outer loop represents the flow of money.
• Households spend money on goods and services.
• Firms use revenue to pay factors of production (wages).
• Profit is what's left for the firm owners.
• Spending on goods and services flows from households to firms, and income flows from firms to households.

Circular Flow Diagram: Example

• A dollar begins in a household wallet.
• The consumer spends it at a local Starbucks, turning it into revenue.
• Starbucks uses the dollar to pay rent or wages to a household.
• The dollar re-enters a consumers wallet, and the economy starts again.