Notes

Section: 1 - Cost
It’s nearly impossible to open a newspaper, listen to the news, or read a magazine without coming across some reference to “the economy”. But what, exactly, are we talking about when we talk about “the economy”?

A very simple explanation is that the economy is a system (agreed upon way to do things) to exchange resources (things we have and value) for the things we need.

The most basic principle of economics is that everything has a cost and you cannot get something for nothing***. Cost does not necessarily always have a monetary value. Cost can come in other forms, such as time or effort.***

Are we all ever able to get everything we want and/or need? The answer to that is no; the reason for that is the fundamental problem of scarcity. Scarcity means there aren’t enough resources for making all the things that people want to have. If there were, we would never need to make choices and decisions about how to get everything we want and need.

Because we can’t always get everything we want and need, there has to be a way that we all agree on how to get what we most need or want. The agreements we make are the elements of our “economy” – in the United States we agree to exchange our labor for money, which we then use to buy the things we want and need.

As consumers, we have to choose what things are most important to spend our resources on.

As producers, the people who provide those things to us must decide what, how, and for whom to produce.



Economists talk about people’s needs and wants.

A need is a basic requirement for survival, such as food, clothing, and shelter.
A want is a way of expressing a need.
Need: Food ====> Want: Pizza

When we use the term economics, we are talking about the processes [actions or steps] we use – producing, distributing, consuming, and exchanging - to obtain and manage necessary material goods. Economics is based on the idea that you cannot get something for nothing; everything has a cost.

While the concept of “economy” is relatively simple, applying the concept to the way that we, as Americans, use the economy can be very complicated. This chapter will examine some of the elements that describe or contribute to the economy of the United States.

Cost


In Economics, “cost” does not always mean money. Cost can be money, time, effort, or all of these. It’s possible that the thing you want isn’t actually a thing you can buy or touch. For example, you may want to be good at math, or be athletic, or understand how your computer works.

Therefore, individual choice can play a big part in economics, because it helps you decide what you want to spend your resources on. Making these choices means you also have to choose what NOT to spend your resources on, because everyone has limits to resources.

In order to make these choices, you often have to think about the opportunity cost, or what you give up to get something else. Making these choices means doing a cost-benefit analysis.

A cost-benefit analysis is when you determine the COST of a situation or action, and then determine what the BENEFIT of taking that action would be.

Example 1 of a Cost-Benefit Analysis

Monetary example: You love to eat steak. You have heard that a new steak restaurant has opened in your neighborhood. Checking their menu online, you see that the kind of dinner you want would cost you $40. Your weekly food budget it $60.
You have several options and can make the decision that works for you by doing a cost-benefit analysis. For example:

1. You can go to the restaurant, spend $40 and try to spend the next six days eating on only $3.30 a day OR $19.80.
2. You can save $20 a week for two weeks, leaving yourself about $5.71 a day for food OR $79.94 for two weeks.
3. You can save $10 a week for four weeks, and have $7.14 a day for food or $199.92 for four weeks.

Obviously there are many other ways you could save the money to go to the steak restaurant, but these are examples of the opportunity cost, or what you give up (some of your weekly food budget) to have the opportunity (dinner at the steak restaurant) that you want.

Example 2 of a Cost-Benefit Analysis

Time/Cost example: You decide that you would like to earn extra money by selling homemade fudge. You want to sell the fudge for $10 a pound. From that $10, you want to make a profit of $4 for every pound you sell. Before you know if this is worth your time and effort, you need to know:

• How much will it cost for ingredients, the electricity/gas used to make the fudge, any advertising you need to do to attract buyers.
• What will it cost you in time that you might spend doing something else. For example, will you have to cut your hours at another job? Will you have less time to spend with your family? Will you need to hire someone to watch your children while you make fudge?

When you have done these things, you are ready to compare the cost (time and money) to make the fudge to the income you expect to earn from the fudge. Then you know if the gains you get from selling the product are greater or less than the cost.

An economic certainty is that

There Is No Such Thing as a Free Lunch.

Even if you have a free coupon for a hamburger at your favorite restaurant, someone had to pay the farmer for raising the food, the truck driver for delivering the food, the chef for preparing the food, and the server for serving the food.

The restaurant that gave you the “free” burger has hidden the cost somewhere in the prices it charges for its products. They have analyzed the benefit they get when you come to their restaurant for the free burger against the cost of producing the burger. They are probably planning on you paying for fries and a milkshake, bringing friends who don’t have a coupon, or in some other way paying a cost that may have been raised to cover the cost of “free” hamburgers.



The economy is made up of these elements:
• Production – making goods available for use
• Distribution – sharing or supplying things
• Consumption – using something
• Exchange of goods and services – trading things

1. PRODUCTION



Production is simply the process of creating goods and services. To produce something you need to consider the combined use of

Land: natural resources or “gifts of nature” not created by human effort;
Capital: tools, equipment, and factories used in the production of goods and services;
Labor: people and their abilities and efforts;
Entrepreneurs: risk-takers who try to make profits by doing something new with existing resources.
These four things – land, capital, labor, and entrepreneurs – are called the “Four Factors of Production.” They are necessary for production to take place.
The rate at which goods or services are produced is called the productivity.

Example of Production

Suppose you wanted to make and sell jewelry. Look at how these factors might be necessary to bring jewelry to the people who might buy it.

“Land” – In the case of jewelry, “land” might mean an actual physical place like a jewelry store or a booth at a fair. It can also mean, considering “gifts of nature,” the gold, silver, and/or stones that are used to make the jewelry.

“Capital” – A person making jewelry must first have money or goods to trade in order to get the materials to make the jewelry. He or she also would need tools and equipment for jewelry making, and someplace to make the jewelry, whether in a factory, a room in their home, or a workshop. If hiring workers, the workers’ wages would also require capital.

“Labor” – This is probably the easiest to understand, as a person or group of people are needed to do the actual work. This includes buying the materials, designing the jewelry, making the jewelry, and selling the jewelry.

“Entrepreneurs” – The entrepreneurs would be needed to organize the first three factors and be sure that everything gets done.

The goal of production is generally to produce a profit after the four factors have been met. Profit is the extra money, or capital, earned when a product is sold for more than it cost to produce.

Section: 1 - Cost
It’s nearly impossible to open a newspaper, listen to the news, or read a magazine without coming across some reference to “the economy”. But what, exactly, are we talking about when we talk about “the economy”?

A very simple explanation is that the economy is a system (agreed upon way to do things) to exchange resources (things we have and value) for the things we need.

The most basic principle of economics is that everything has a cost and you cannot get something for nothing***. Cost does not necessarily always have a monetary value. Cost can come in other forms, such as time or effort.***

Are we all ever able to get everything we want and/or need? The answer to that is no; the reason for that is the fundamental problem of scarcity. Scarcity means there aren’t enough resources for making all the things that people want to have. If there were, we would never need to make choices and decisions about how to get everything we want and need.

Because we can’t always get everything we want and need, there has to be a way that we all agree on how to get what we most need or want. The agreements we make are the elements of our “economy” – in the United States we agree to exchange our labor for money, which we then use to buy the things we want and need.

As consumers, we have to choose what things are most important to spend our resources on.

As producers, the people who provide those things to us must decide what, how, and for whom to produce.



Economists talk about people’s needs and wants.

A need is a basic requirement for survival, such as food, clothing, and shelter.
A want is a way of expressing a need.
Need: Food ====> Want: Pizza

When we use the term economics, we are talking about the processes [actions or steps] we use – producing, distributing, consuming, and exchanging - to obtain and manage necessary material goods. Economics is based on the idea that you cannot get something for nothing; everything has a cost.

While the concept of “economy” is relatively simple, applying the concept to the way that we, as Americans, use the economy can be very complicated. This chapter will examine some of the elements that describe or contribute to the economy of the United States.

Cost


In Economics, “cost” does not always mean money. Cost can be money, time, effort, or all of these. It’s possible that the thing you want isn’t actually a thing you can buy or touch. For example, you may want to be good at math, or be athletic, or understand how your computer works.

Therefore, individual choice can play a big part in economics, because it helps you decide what you want to spend your resources on. Making these choices means you also have to choose what NOT to spend your resources on, because everyone has limits to resources.

In order to make these choices, you often have to think about the opportunity cost, or what you give up to get something else. Making these choices means doing a cost-benefit analysis.

A cost-benefit analysis is when you determine the COST of a situation or action, and then determine what the BENEFIT of taking that action would be.

Example 1 of a Cost-Benefit Analysis

Monetary example: You love to eat steak. You have heard that a new steak restaurant has opened in your neighborhood. Checking their menu online, you see that the kind of dinner you want would cost you $40. Your weekly food budget it $60.
You have several options and can make the decision that works for you by doing a cost-benefit analysis. For example:

1. You can go to the restaurant, spend $40 and try to spend the next six days eating on only $3.30 a day OR $19.80.
2. You can save $20 a week for two weeks, leaving yourself about $5.71 a day for food OR $79.94 for two weeks.
3. You can save $10 a week for four weeks, and have $7.14 a day for food or $199.92 for four weeks.

Obviously there are many other ways you could save the money to go to the steak restaurant, but these are examples of the opportunity cost, or what you give up (some of your weekly food budget) to have the opportunity (dinner at the steak restaurant) that you want.

Example 2 of a Cost-Benefit Analysis

Time/Cost example: You decide that you would like to earn extra money by selling homemade fudge. You want to sell the fudge for $10 a pound. From that $10, you want to make a profit of $4 for every pound you sell. Before you know if this is worth your time and effort, you need to know:

• How much will it cost for ingredients, the electricity/gas used to make the fudge, any advertising you need to do to attract buyers.
• What will it cost you in time that you might spend doing something else. For example, will you have to cut your hours at another job? Will you have less time to spend with your family? Will you need to hire someone to watch your children while you make fudge?

When you have done these things, you are ready to compare the cost (time and money) to make the fudge to the income you expect to earn from the fudge. Then you know if the gains you get from selling the product are greater or less than the cost.

An economic certainty is that

There Is No Such Thing as a Free Lunch.

Even if you have a free coupon for a hamburger at your favorite restaurant, someone had to pay the farmer for raising the food, the truck driver for delivering the food, the chef for preparing the food, and the server for serving the food.

The restaurant that gave you the “free” burger has hidden the cost somewhere in the prices it charges for its products. They have analyzed the benefit they get when you come to their restaurant for the free burger against the cost of producing the burger. They are probably planning on you paying for fries and a milkshake, bringing friends who don’t have a coupon, or in some other way paying a cost that may have been raised to cover the cost of “free” hamburgers.



The economy is made up of these elements:
• Production – making goods available for use
• Distribution – sharing or supplying things
• Consumption – using something
• Exchange of goods and services – trading things

1. PRODUCTION



Production is simply the process of creating goods and services. To produce something you need to consider the combined use of

Land: natural resources or “gifts of nature” not created by human effort;
Capital: tools, equipment, and factories used in the production of goods and services;
Labor: people and their abilities and efforts;
Entrepreneurs: risk-takers who try to make profits by doing something new with existing resources.
These four things – land, capital, labor, and entrepreneurs – are called the “Four Factors of Production.” They are necessary for production to take place.
The rate at which goods or services are produced is called the productivity.

Example of Production

Suppose you wanted to make and sell jewelry. Look at how these factors might be necessary to bring jewelry to the people who might buy it.

“Land” – In the case of jewelry, “land” might mean an actual physical place like a jewelry store or a booth at a fair. It can also mean, considering “gifts of nature,” the gold, silver, and/or stones that are used to make the jewelry.

“Capital” – A person making jewelry must first have money or goods to trade in order to get the materials to make the jewelry. He or she also would need tools and equipment for jewelry making, and someplace to make the jewelry, whether in a factory, a room in their home, or a workshop. If hiring workers, the workers’ wages would also require capital.

“Labor” – This is probably the easiest to understand, as a person or group of people are needed to do the actual work. This includes buying the materials, designing the jewelry, making the jewelry, and selling the jewelry.

“Entrepreneurs” – The entrepreneurs would be needed to organize the first three factors and be sure that everything gets done.

The goal of production is generally to produce a profit after the four factors have been met. Profit is the extra money, or capital, earned when a product is sold for more than it cost to produce.