BASIC MICROECONOMICS WEEK 2

St. Anthony’s College

San Jose de Buenavista, Antique
BUSINESS EDUCATION DEPARTMENT

HANDOUTS IN BA 201 – BASIC ECONOMICS

Basic Economic Concepts

Week 1
Learning Competencies:
Discuss some key economic terms and concepts

Describing As you read the section, describe the factors that lead to economic growth.

Fundamental Economic Concepts

When you hear the word economics, you probably think of “big business”—large
corporations that run banks and petroleum refineries, or companies that make automobiles,
computers and, yes, even comic books. Economics does include big business, but it also includes
much more.
Like other social sciences, economics has its own vocabulary and uses terms such as
recession, commodity, or utility. To understand economics, a review of key terms is necessary.
Fortunately, most economic terms are widely used, and you will already be familiar with many
of them.

Goods, Services, and Consumers

MAIN Idea Economic products are goods or services that are useful, relatively scarce, and
transferable.
Economics & You Every time you buy something in a store, you act as a consumer. Read on to
learn more about this and other basic economic vocabulary

Economics is concerned with economic products—goods and services that are useful,
relatively scarce, and transferable to others. Economic products help us satisfy our wants and
needs. Because they are both scarce and useful, they command a price.

Goods
There are different types of economic products. The first one is a good—a useful,
tangible item, such as a book, car, or compact disc player, that satisfies a want. When
manufactured goods are used to produce other goods and services, they are called capital goods.
An example of a capital good would be a robot welder in a factory, an oven in a bakery, or a
computer in a high school. Goods intended for final use by individuals are consumer goods.
Any good that lasts three years or more when used on a regular basis is called a durable
good. Durable goods include both capital goods, such as robot welders, and consumer goods,
such as automobiles. A nondurable good is an item that lasts for fewer than three years when
used on a regular basis. Food, writing paper, and most clothing items are examples of nondurable
goods.

Services
The other type of economic product is a service, or work that is performed for someone. Services
include haircuts, home repairs, and forms of entertainment such as concerts. They also include
the work that doctors, lawyers, and teachers perform. The difference between a good and a
service is that a good is tangible, or something that can be touched, while a service is not.

Consumers
Consumers are the people who use goods and services to satisfy their wants and needs. As
consumers, people indulge in consumption, the process of using up goods and services in order
to satisfy wants and needs.

Interpreting How are goods, services, and consumers related?

good - tangible economic product that is useful, relatively scarce, and transferable to others

consumer good - good intended for final use by consumers rather than businesses

durable good – a good that lasts for at least three years when used regularly

nondurable good - a good that wears out or lasts for fewer than three years when used regularly
service work or labor performed for someone

Consumer Goods
These students are using computers in their school computer lab.
Would you consider computers as durable goods or nondurable goods, and why?

Value, Utility, and Wealth

MAIN Idea The value of a good or service depends on its scarcity and utility.

Economics & You Has anyone ever thought you paid too much for something? Read on to learn
how the value of an item is determined.

In economics, value refers to a worth that can be expressed in dollars and cents. Why, then, does
something have value, and why are some things more valuable than others? To answer these
questions, it helps to review a problem Adam Smith, a Scottish social philosopher, faced back in
1776.

The Paradox of Value

Adam Smith was one of the first people to describe how markets work. He observed that
some necessities, such as water, had a very low monetary value. On the other hand, some non-
necessities, such as diamonds, had a very high value. Smith called this contradiction the paradox
of value. Economists knew that scarcity was necessary for something to have value. Still,
scarcity by itself could not fully explain how value is determined

Utility
It turned out that for something to have value, it must also have utility, or the capacity to
be useful and provide satisfaction. Utility is not something that is fixed or even measurable, like
weight or height. Instead, the utility of a good or service may vary from one person to the next.
One person may get a great deal of satisfaction from a home computer; another may get very
little. One person may enjoy a rock concert; another may not.

Value
For something to have monetary value, economists decided, it must be scarce and have
utility. This is the solution to the paradox of value. Diamonds are scarce and have utility, thus
they possess a value that can be stated in monetary terms. Water has utility but is not scarce
enough in most places to give it much value. Therefore, water is less expensive, or has less
monetary value, than diamonds. The emphasis on monetary value is important to economists.
Unlike moral or social value, which is the topic of other social sciences, the value of something
in terms of dollars and cents is a concept that everyone can easily understand.

Wealth
In an economic sense, the accumulation of products that are tangible, scarce, useful, and
transferable from one person to another is wealth. A nation’s wealth is comprised of all tangible
items—including natural resources, factories, stores, houses, motels, theaters, furniture, clothing,
books, highways, video games, and even basketballs— that can be exchanged.
While goods are counted as wealth, services are not, because they are intangible.
However, this does not mean that services are not useful or valuable. Indeed, when Adam Smith
published his famous book The Wealth of Nations in 1776, he was referring specifically to the
abilities and skills of a nation’s people as the source of its wealth. For Smith, if a country’s
material possessions were taken away, its people, through their efforts and skills, could restore
these possessions. On the other hand, if a country’s people were taken away, its wealth would
deteriorate.

Summarizing How are value and utility related?

value – monetary worth of a good or service as determined by the market

paradox of value - apparent contradiction between the high monetary value of a nonessential
item and the low value of an essential item

utility - ability or capacity of a good or service to be useful and give satisfaction to someone

wealth - sum of tangible economic goods that are scarce, useful, and transferable from one
person to another

The Circular Flow of Economic Activity

MAIN Idea The economic activity in markets connects individuals and businesses.

Economics & You When you receive a paycheck, do you understand how you fit in the larger
economy?
Read on to learn about the flow of economic activity.

The wealth that an economy generates is made possible by the circular flow of economic
activity. The key feature of this circular flow is the market, a location or other mechanism that
allows buyers and sellers to exchange a specific product. Markets may be local, national, or
global—and they can even exist in cyberspace.
Factor Markets
As shown in Figure 1.3, individuals earn their incomes in factor markets, where the
factors of production are bought and sold.
This is where entrepreneurs hire labor for wages and salaries, acquire land in return
for rent, and borrow money. The concept of a factor market is a simplified but realistic version of
the real world. For example, you participate in the factor market when you work and sell your
labor to an employer.

Product Markets
After individuals receive their income from the resources they sell in a factor market,
they spend it in product markets. These are markets where producers sell their goods and
services. Thus, the wages and salaries that individuals receive from businesses in the factor
markets returns to businesses in the product markets. Businesses then use this money to produce
more goods and services, and the cycle of economic activity repeats itself.

Explaining What roles do factor markets and product markets play in the economy?

Market – meeting place or mechanism that allows buyers and sellers to come together

factor market - market where the factors of production are bought and sold

product market - market where goods and services are bought and sold

Productivity and Economic Growth

MAIN Idea A nation’s economic growth is due to several factors.

Economics & You Have you decided yet what you will do after graduating from high school?
Read
on to learn how investing in more education now can give you a higher lifetime income.

Economic growth occurs when a nation’s total output of goods and services increases over time.
This means that the circular flow becomes larger, with more factors of production, goods, and
services flowing in one direction and more payments in the opposite direction. Productivity is the
most important factor contributing to economic growth.

Productivity
Everyone in a society benefits when scarce resources are used efficiently. This is
described by the term productivity, a measure of the amount of goods and services produced
with a given amount of resources in a specific period of time.
Productivity goes up whenever more can be produced with the same amount of resources.
For example, if a company produced 5,000 pencils in an hour, and it produced 5,100 in the next
hour with the same amount of labor and capital, productivity went up. Productivity is often
discussed in terms of labor, but it applies to all factors of production.

Investing in Human Capital

A major contribution to productivity comes from investments in human capital, the sum
of people’s skills, abilities, health, knowledge, and motivation. Government can invest in human
capital by providing education and health care. Businesses can invest in training and other
programs that improve the skills of their workers. Individuals can invest in their own education
by completing high school, going to technical school, or attending college.
Figure 1.4 shows that investments in education can have substantial payoffs. According
to the table, high school graduates earn substantially more than nongraduates, and college
graduates make even more than high school graduates. Educational investments require that we
make a sacrifice today so we can have a better life in the future, and few investments generate
higher returns.

Division of Labor and Specialization

 Division of labor and specialization can improve productivity. Division of labor is a way
of organizing work so that each individual worker completes a separate part of the work. In most
cases, a worker who performs a few tasks many times a day is likely to be more proficient than a
worker who performs hundreds of different tasks in the same period.
Specialization takes place when factors of production perform only tasks they can do
better or more efficiently than others. The division of labor makes specialization possible. For
example, the assembly of a product may be broken down into a number of separate tasks (the
division of labor). Then each worker can perform the specific task he or she does best
(specialization). One example of the advantages offered by the division of labor and
specialization is Henry Ford’s use of the assembly line in automobile manufacturing. Having
each worker add one part to the car, rather than a few workers assembling the entire vehicle, cut
the assembly time of a car from a day and a half
to just over 90 minutes—and reduced the price of a new car by more than 50 percent.

Economic Interdependence
The U.S. economy has a remarkable degree of economic interdependence. This means
that we rely on others, and others rely on us, to provide most of the goods and services we
consume. As a result,
events in one part of the world often have a dramatic impact elsewhere.
This does not mean that interdependence is necessarily bad. The gains in productivity and
income that result from specialization almost always offset the costs associated with the loss of
self-sufficiency.

Analyzing What role does specialization play in the productivity of an economy?

Economic growth - increase in a nation’s total output of goods and services over time

Productivity - measure of the amount of output produced with a given amount of productive
factors

human capital - sum of people’s skills, abilities, health, knowledge and motivation
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Vocabulary
1. Explain the significance of good, consumer good, durable good, nondurable good, service, value,
paradox of value, utility, wealth, market, factor market, product market, economic growth, productivity,
human capital, division of labor, specialization, and economic interdependence.

Main Ideas
2. Explaining How do goods and services differ?
3. Organizing Use a graphic organizer similar to the one below to describe the different transactions that
take place in product markets.

4. Describing How is economic growth related to productivity?

Critical Thinking
5. How is value related to scarcity and utility?
6. Drawing Conclusions Why is investing in human capital beneficial?
7. Analyzing Visuals Look at Figure 1.3. How can individuals increase the flow of circular activity?
What effect would this increase have on the other parts of the economy?
8. Inferring How might major events such as labor strikes affect you and your community? Select a
possible event and write a brief paragraph about the potential effects.
Applying Economics
9. Specialization Provide at least three examples each of specialized workers and specialized capital that
are used in your school to provide the service of education. How would productivity change if they were
not available to your school? 1.4