micro-unit one review - THE ESSENCE OF ECONOMICS The...

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THE ESSENCE OF ECONOMICS The essence of economics is scarcity. The source of scarcity is the limited quantity of resources available with which to produce the goods and services desired. Economists reduce resources to 3 or 4 broad categories: Land = all natural resources, things which exist in spite of humans, rather than because of them (climate, water, thunder, oil, wind, sand, etc.) Capital = things created by humans to help them to create other things which they prefer (equipment, buildings, tools, etc.) Human = human input, which is generally further divided into: Labor : the non-owner contribution Entrepreneur : the owner/operator - bearing the risk of having chosen to produce something for which there may be no Demand. The essence of scarcity lies both in quantity available and in time: if there is only one resource and it is being used for one activity, then it is not available for another. If I am using a hammer to nail down a roof, then you cannot be using the same hammer at the same time; nor can you get me to help you with your hammering job so long as I am engaged in my own. When there are two alternative claims on a resource, then a choice must be made; something must be given up in favor of something else. When the economist talks of opportunity cost , it is this opportunity given up to which he is referring. Some opportunity costs are quantifiable but not necessarily in monetary terms ("I wasted all last night studying for an exam, and then the teacher postponed it to next week! I could have spent the time catching up on my sleep!": the cost of studying all night was the sleeping time lost.) Some costs can be quantified in monetary terms ("My folks made me choose between a Honda and a Toyota, and I felt I got more for my money with the Honda.": the cost of the Honda was the Toyota one could have bought with the same money.) Sometimes the benefit of using a resource falls on one party, and the cost on someone else ("Dad, it would be so much more efficient if you'd just add me to the list of people who can use your credit card!" "Once the natural habitat of the spotted owl is destroyed, the bird will become extinct; you loggers will simply have to find some other way to support your families.") Some costs are immeasurable - the novel, Sophie's Choice , describes the agonizing decision forced on a Jewish mother, who was told by the Nazis to choose which of her two children should die. For some people, who have many many trade goods (lots of money), the monetary cost of an item is meaningless: the opportunity cost of a Rolls Royce is practically zero if buying one does not mean one must therefore forgo buying any other thing that one might fancy. The cost of the Rolls rises if one must choose between a Rolls this year and that chateau in the Alps. It becomes astronomical if one must work 8 hours a day, 40 hours a week, 50 weeks a year for the rest of your life to finishing earning the money to pay for it. Thus the real cost of the Rolls to the Arab oil sheik is no higher than the real
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