Supply and Demand and Opportunity Cost

Topics: Supply and demand, Economics, Demand curve Pages: 111 (40394 words) Published: August 19, 2013
Chapter 1 notes
Definition of Economics
The first thing that we should discuss is the definition of "economics." Economists generally define economics as the study of how individuals and societies use limited resources to satisfy unlimited wants. To see how this concept works, think about your own situation. Do you have enough time available for everything that you wish to do? Can you afford every item that you would like to own? Economists argue that virtually everyone wants more of something. Even the wealthiest individuals in society do not seem to be exempt from this phenomenon. This problem of limited resources and unlimited wants also applies to society as a whole. Can you think of any societies in which all wants are satisfied? Most societies would prefer to have better health care, higher quality education, less poverty, a cleaner environment, etc. Unfortunately, there are not enough resources available to satisfy all of these goals. Thus, economists argue that the fundamental economic problem is scarcity. Since there are not enough resources available to satisfy everyone’s wants, individuals and societies have to choose among available alternatives. An alternative, and equivalent, definition of economics is that economics is the study of how such choices are made. Economic Goods, Free Goods, and Economic Bads

A good is said to be an economic good (also known as a scarce good) if the quantity of the good demanded exceeds the quantity supplied at a zero price. In other words, a good is an economic good if people want more of it than would be available if the good were available for free. A good is said to be a free good if the quantity of the good supplied exceeds the quantity demanded at a zero price. In other words, a good is a free good if there is more than enough available for everyone even when the good is free. Economists argue that there are relatively few, if any, free goods. An item is said to be an economic bad if people are willing to pay to avoid the item. Examples of economic bads include things like garbage, pollution, and illness. Goods that are used to produce other goods or services are called economic resources (and are also known as inputs or factors of production). These resources are often categorized into the following groups: 1. Land,

2. Labor,
3. Capital, and
4. Entrepreneurial ability.
The category of "land" includes all natural resources. These natural resources include the land itself, as well as any minerals, oil deposits, timber, or water that exists on or below the ground. This category is sometimes described as including only the "free gifts of nature," those resources that exist independent of human action. The labor input consists of the physical and intellectual services provided by human beings. The resource called "capital" consists of the machinery and equipment used to produce output. Note that the use of the term "capital" differs from the everyday use of this term. Stocks, bonds, and other financial assets are not capital under this definition of the term. Entrepreneurial ability refers to the ability to organize production and bear risks. Your text does not list this as a separate resource, but instead considers it as a type of labor input. Most other introductory texts, though, list this as a separate resource. (No, your text is not wrong, it just uses a different way of classifying resources. I think its better, though, to stick with the somewhat more standard classification in this course.) The resource payment associated with each resource is listed in the table below: |Economic Resource |Resource Payment | |land |rent | |labor |wages | |capital |interest | |entrepreneurial ability |profit |

Rational Self-interest
As noted above,...
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