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101chapter1 - Chapter 1 The Economic Way of Thinking The...

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Chapter 1: The Economic Way of Thinking The Economic Problem Production Possibilities Economic Analysis
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Got stuff? Who made it? How was it made? How did you get it?
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I. The Economic Problem the basic economic problem is scarcity : -- wants are unlimited, but resources are limited so with scarcity, we must make choices, and with choices, come costs
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Cost is the opportunity cost -- what you give up when you make a choice -- “there’s no such thing as a free lunch”
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Cost of going to college -- what you can buy with tuition & fees -- what you could earn by working -- what you could do with the free time
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you are willing to give up -- tuition -- wages -- leisure time to go to college -- b/c you expect higher income or more rewarding career
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economics is the study of choices of how to allocate scarce resources choices made by -- consumers -- businesses -- governments
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What are resources? use resources to produce goods and services factors of production -- land -- labor -- capital -- entrepreneurship
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Land all natural resources -- land -- minerals -- water -- wildlife
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Labor size of labor force (quantity) skills of labor force (quality) -- human capital the value of time
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Capital physical capital -- goods used to make other goods -- factories -- machines -- infrastructure
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NOT financial capital -- stocks, bonds, bank loans financial capital facilitates building of physical capital
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entrepreneurship human resource ideas -- doing things better -- e-commerce -- new products
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Three Questions to answer: 1. What to produce? 2. How to produce the stuff in #1? 3. For whom to produce? (who gets the stuff in #1?)
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Example: A Lexus 1. What to produce? Toyota designs a luxury car with buyers in mind Toyota decides how much to produce give the price and their costs Buyers decide how many to buy, based on price, their income, tastes, etc.
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Toyota designs factory, uses machinery, & trains workers to minimize cost BUT retain a certain quality U.S. government restricts this decision: Pollution laws safety laws labor laws 2. How to produce?
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Those who are willing and able to pay $50,000 for one.
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