The Foundations of Economics Chapter 1

1. The Foundations of EconomicsChapter 1 Presented by: MattayBotcheff

2. What Is Economics? • Social science – study of people in society & how they interact with each other • There are limited resources used to produce goods (physical objects) and services (intangible) • People have infinite wants and needs • Economics studies how scarce resources are allocated to fulfill the infinite wants of consumers

3. Key Terms in Economics • Scarcity – the universal state in which wants exceed resources • Choice – people have to decide on how to allocate their limited resources • Opportunity cost – the next best alternative foregone when an economic decision is made (e.g. what you give up to have something else) • Economic goods (relatively scarce) vs. free goods (not limited in supply)

4. The Basic Economic Problem • What should be produced and in what quantities? • How should things be produced? • Who should things be produced for?

5. Factors of Production • Land – all natural resources • Labour – physical and mental contribution of the existing workforce to production • Capital – investment in physical capital (factories) and human capital (education) • Entrepreneurship – takes on risk & organises the other factors of production

6. Production Possibility Frontiers • Production possibility curves (PPC) are used to show the concepts of scarcity, choice, opportunity cost, etc. • PPC shows the maximum combinations of goods and services that can be produced by an economy in a given time period, if all resources are fully utilised and the state of technology is fixed • PPC shifts outward when there is an increase in the quantity or quality of the factors of production • PPC shifts inwards when there is a fall in the quantity of factors of production

7. Production Possibilities Curve

8. Utility • Utility – measure of usefulness and pleasure • Total utility – the total satisfaction gained from consuming a certain quantity of a good or service • Marginal utility – the extra utility gained from consuming one more unit of a product • Marginal utility falls as consumption increases

9. Adam Smith & Classical Economics • Adam Smith (1723 – 1790) – “father of modern economics” • Wrote “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) – published at the beginning of the Industrial Revolution • He believed in free markets – consumers buy and producers sell what they like without government interference • Everyone follows their best interest • Laissez-faire (don’t interfere) approach • “Invisible hand” of competition results in the most efficient outcome • Identified possible problems – firms colluding to exploit consumers; firms getting too large allowing them to dominate the market

10. The Circular Flow of Income

11. Measuring National Income

12. The Foundations of Economics

13. Questions & Answers

14. Summary • Economics studies how scarce resources are allocated to fulfill the infinite wants of consumers • Economics answers what should be produced and in what quantities; how it should be produced; and for whom it should be produced • Factors of production – land, labour, capital, entrepreneurship • Production possibility curves show what can be produced in an economy in a given period of time, if all resources are fully and efficiently utilised and the state of technology is fixed • Utility measures usefulness and pleasure from the consumption of products • Adam Smith, author of “An Inquiry into the Nature and Causes of the Wealth of Nations” and the “father of modern economics”, believed in free markets, which let consumers buy and producers sell what they like without government interference

15. Source: Economics by Jocelyn Blink & Ian Dorton More Resources: For current Economics issues related to our course, please visit: https://twitter.com/MattBotcheff/