Thursday, February 28, 2008

What is Economics? - Entire Module

Economics is the study of how scare products and resources are allocated to satisfy seemingly unlimited needs and wants. The core concept in economics is that scarcity requires that choices be made.

Objectives

After reading this entry, you should be able to:
· define economics.
· explain the economizing problem.
· define economic resources.
· list the three types of economic resources and give examples of each.
· define labor.
· define and explain the relationships between blue-collar workers and white-collar workers, the Rust Belt, and Silicon Valley.
· define a tangible commodity.
· define productivity.
· define and explain the functional areas of business (entrepreneurship, management, marketing, finance, and accounting).
· define and explain the special types of labor used in business (entrepreneur, manager, marketer, financier, capitalist, and accountant).
· provide at least one example of a successful entrepreneur.
· list and explain the marketing mix (the four P’s of marketing).
· define capital and explain the difference between physical capital, human capital, technology, and financial capital.
· explain the difference between stocks and bonds.
· explain the difference between retained earnings and dividends.
· define natural resources and explain the difference between those that are renewable and non-renewable.
· list the three types of economic systems and give examples of each.
· define and explain the difference between a household and a business firm.
· define a black market.
· explain the difference between efficiency and equity.
· explain the difference between traditional conservatives and traditional liberals.
· explain the difference between macroeconomics and microeconomics.
· explain the difference between products, goods, and services.
· explain the limitations of economics as a field of study
· explain the difference between positive and normative analysis.
· explain why it is important to study economics.


What is Economics?

Do you have everything you want? Most people can think of many things they want and do not have. Are any of the following items on your wish list?
a car
a house
a large-screen plasma television
a computer
an Apple iPod
more jewelry
more clothes
more shoes

Even if you have some of these items, you might want newer, bigger, or better ones.

Why don’t you have all of these things?

The answer is probably because they cost too much. If a large-screen plasma television cost a nickel, then you would probably have one. If a new car cost a dime, then you would probably have one. If your dream house cost a dollar, then you would probably have it.

Why do some things cost so much? How are prices determined? Are expensive things more valuable than inexpensive things? To help answer these questions, consider air. Air is tremendously valuable to people. Without a constant supply of air, all mammals, including humans, die. So air is extremely valuable. Yet how much do people pay for air? If they are anywhere close to the surface of the earth, the answer is probably nothing. Air is so abundant on the surface of the earth that people just inhale to consume as much of it as they want. When people leave the earth’s surface, however, air becomes more expensive. Scuba divers, for example, pay dive shops to fill scuba tanks with compressed air for use while swimming under water for extended periods of time. So prices have very little to do with value. If they did, air would be extremely expensive because people cannot live without air.

Prices are determined by the relative scarcity or abundance of an item in relation to its desirability. An item is abundant if it is widely available. An item is scarce if it is not widely available. However, relative scarcity or abundance alone is not sufficient to explain why things are expensive. Lithiophilite is a scarce phosphate mineral. Yet, it does not have many practical uses. So people are not paying millions of dollars to fill their yards with lithiophilite.

In real estate markets, waterfront property is generally more expensive than similar property away from the beach, river, or lake. Part of the explanation for these differences is relative scarcity and abundance. There is not as much waterfront property as there is property without access to water. The other part of the explanation is that waterfront property is generally more desirable than other properties.

How does society decide who lives in houses on the beach and who lives elsewhere? What determines who drives new luxury sports cars and who drives jalopies? Who wears the latest clothing fashions and who wears hand-me-down clothes?

Economics is the study of how scarce resources are allocated to satisfy seemingly unlimited needs and wants.

No matter how many material possessions people have, it seems they always want more. People’s needs and wants are seemingly unlimited. The things that can be used to satisfy human needs and wants are limited, however. The earth and all its resources are finite. Thus, the economizing problem is that people’s needs and wants are seemingly unlimited, yet the resources they can use to satisfy those needs and wants are limited.

Consequently, society must make choices about what things will be produced, how they will be made, who will produce them, and who will consume them.


Economic Resources

Economic resources are the things people use to attempt to satisfy their needs and wants. They can be divided into three categories: labor, capital, and natural resources.


Labor – the human economic resources

Labor is human effort, both physical and mental. People use their time and effort to produce things that are useful to themselves or others. Examples of labor are teachers, bankers, construction workers, steelworkers, plumbers, entrepreneurs, and managers.

Economists use various terms to describe different types of labor. A white-collar worker typically performs work that does not involve manual labor, is paid an annual salary instead of hourly wages, and is expected to dress with some formality. Examples of white-collar workers are business executives, stockbrokers, insurance salespeople, bankers, and lawyers. The origin of the expression is that men in these professions traditionally wear a white dress shirt, suit, and tie to work. White-collar workers are often associated with the service sector, which is the area of the economy that does not result in the production of a tangible commodity. A tangible commodity is a product that can be touched or held, such as an apple, a sweater, or a house.

A blue-collar worker typically performs work that involves manual labor, is paid hourly wages, and dresses in clothes that may become heavily soiled. Examples of blue-collar workers are automobile mechanics, garbage collectors, and construction workers. The origin of the expression is that men in these professions often wear a uniform with a blue shirt. Blue-collared workers are often associated with the manufacturing sector, which is the area of the economy that produces tangible commodities.

The Rust Belt is the heavily industrialized area of the upper Midwestern U.S. that contains older factories, many of which are closed. Manufacturing jobs in industries such as automobiles, steel, and coal mining used to be a significant source of employment in Michigan, Indiana, Ohio and Pennsylvania. Over the last few decades, Americans have increasingly preferred to buy manufactured products from cheaper foreign producers.

It is normal for there to be changes in the types of industries that are the most successful in a particular economy. Silicon Valley is a region southeast of San Francisco, California, which is known for its computer and other high-technology industries. These American industries flourished in the 1990s, but have faced increasing foreign competition in recent years.

There is a relationship between education, skills, training, and productivity. Productivity is the amount of output that can be produced in an hour of a worker’s time. Increases in education, skills, and training are usually associated with increases in productivity. As people become more productive, businesses are usually willing to pay them more. To illustrate this concept, consider two salespeople. If one person sells $50,000 worth of a company’s products per year while another person generates $1 million of sales per year, who is more deserving of higher pay? Salespeople are usually paid a commission, which means they are paid based on the value of their sales. Consequently, companies usually pay salespeople more when they generate more sales.

This relationship between education and productivity also explains why most students attend college. As people become better educated, they tend to become more productive. More productive people tend to earn higher incomes. Consequently the most frequently cited reason for attending college is to enable people to obtain a better, higher-paying job than would occur in the absence of the education.

Education, skills, and training are sometimes referred to as human capital.

Special Types of Labor in Business

The business world is divided into several functional areas, such as entrepreneurship, management, marketing, finance, and accounting. Entrepreneurship is the invention of new products, the improvement of existing products, or the delivery of products in better or more efficient ways. Management is the allocation of economic resources. Marketing is the process of informing society about products in an attempt to convince potential consumers to purchase them. Finance is the management of money, credit, and other financial assets. Accounting is the preparation and inspection of financial reports. Each of these functional areas of business has a special type of labor associated with it.

An entrepreneur is someone who invents a new product that satisfies a want or need of society, improves an existing product, or provides a product in a better or more efficient way. One way to become wealthy is to become a successful entrepreneur. Mark Cuban, the owner of the National Basketball Association’s Dallas Mavericks, acquired his wealth by being a successful entrepreneur. Cuban co-founded Broadcast.com, which provided streaming multimedia on the Internet, in 1995. The Internet company Yahoo! Inc. purchased Broadcast.com in 1999 for $5.7 billion. Successful entrepreneurs are usually highly motivated, creative leaders with some specialized knowledge that can be used to help satisfy the wants or needs of society.

A manager is someone who allocates economic resources. Successful managers are efficient in their use of labor, capital, and natural resources. Economic efficiency occurs when a society obtains the largest possible amount of output from a given set of resources. Skillful management is a key component of successful businesses. Examples of the importance of management are provided by professional sports. The head coach of a baseball team is called the manager and the major league baseball executives in charge of hiring players are called general managers. Four men have even been elected to Baseball’s Hall of Fame based solely on their achievements as general managers: Ed Barrow, Larry MacPhail, Branch Rickey, and George Weiss.

A marketer is someone who promotes the purchase or sale of a product. The marketing process includes the conception, pricing, promotion, and distribution of ideas, goods, and services. These are often referred to as the marketing mix or the four Ps of marketing: product (conception), price, promotion, and place (distribution). Businesses paid an average of $2.4 million for a 30 second commercial during the 2005 Super Bowl. The willingness of some firms to pay such large sums for advertising indicates the importance of marketing to the success of businesses.

A financier is someone who engages in large-scale financial affairs. A financier is sometimes called a capitalist if he or she invests in a business by providing it with significant money or other financial assets. It is not uncommon for people who develop new products to lack the financial resources to market their ideas. Financiers may provide these entrepreneurs with the financial capital to develop and market their products in return for a share of the revenues or profits from future sales.

An accountant is someone who prepares and inspects the tax reports and other financial records of individuals or businesses. Financiers and other business executives rely on accountants to provide an accurate portrayal of the financial condition of a company. Accountants also assist individuals in the preparation of personal financial reports, such as income tax returns for federal, state, and local governments.


Capital – the manufactured economic resources

In its broadest sense, capital is anything that increases productivity. Capital allows workers to produce more output with an hour of labor. Economists divide capital into four categories: physical capital, human capital, technology, and financial capital.

Physical capital is anything tangible and man-made that makes workers more productive. Examples of physical capital are computers, cars, pencils, microwave ovens, factories, and machinery. For example, a postal worker delivering mail to houses that are far apart can do it more efficiently with a truck rather than walking. In an hour of time, the mailman with a vehicle could deliver to more homes than the postal worker on foot.

Education and training also make most workers more productive. Human capital is the education, skills, and training that workers acquire that make them more productive. For example, skilled workers can construct more framing for a new building in an hour of time than the same number of unskilled workers. Similarly, a professionally trained nurse may be able to assist more patients in an hour at a hospital emergency room than someone without that education.

Technology is the knowledge and methodology of means of production. For example, sweaters can be knitted by hand or by factory machines. And the machines can be operated by people or controlled by computers. At a give point in time, some countries may have access to technologies, such as computer-controlled machinery, that are not available in other parts of the world. The adoption of new technologies often leads to an increase in productivity.

Financial capital is the money or other financial assets used to purchase the physical capital, human capital, and technology that make workers more productive. When a business considers increasing its physical capital, for example by buying machinery or building a new factory, it may not have enough money to pay for the entire purchase. Consequently, a business may need to raise financial capital in order to purchase physical capital. For relatively small purchases of physical capital, businesses may be able to use retained earnings as the source of financial capital. Retained earnings are the portion of a company’s profits that are not distributed to the owners of the business. For relatively large purchases of physical capital, businesses may borrow financial capital. The most common example of this is a business loan from a commercial bank. Corporations have two other options for raising financial capital, however. Corporations can issue corporate bonds, in which they borrow money directly from the public without using commercial banks as financial intermediaries. A bond is a financial asset that represents a loan from the purchaser of the bond to the issuer of the bond. Purchasers of bonds are lending money to the issuers of the bonds. Corporations also can raise financial capital by selling additional shares of stock. A stock is a financial asset that represents a share of ownership of a corporation. The owners of stock are called stockholders. A dividend is the share of corporate profit that is distributed to each stockholder.

The word capital is often used to refer to human capital, physical capital, technology, or financial capital. The correct meaning of the word is determined by the context of its usage.


Natural Resources – the natural economic resources

A natural resource is anything provided by nature that can be used to satisfy human needs and wants. Economists sometimes refer to natural resources as land. However, as a category of economic resources, land also includes anything nature provides in the air or water, on land, or under the earth. Examples of natural resources are soil, water, trees, minerals, animals, sunlight, and air.

Some natural resources are renewable and others are nonrenewable. A renewable resource is capable of being replaced in a relatively short period of time. Examples of renewable natural resources are the sun, wind, forests, fish, oxygen, and fresh water. A nonrenewable resource either cannot be replaced or its replacement requires an extremely long period of time. Examples of nonrenewable natural resources are minerals and fossil fuels, such as oil, coal, and natural gas.[i]

It is possible for renewable resources to become nonrenewable if they are mismanaged by society. Plants and animals become nonrenewable if they are allowed to become extinct. Forests can become nonrenewable if they are clear-cut. Fresh air and water can become nonrenewable if they are damaged by pollution. Soil can become nonrenewable if society uses damaging agricultural practices. Many societies ask the government to help protect renewable resources from becoming nonrenewable.


Economic Systems

Economic systems are methods of resource allocation. They can be divided into three categories: tradition, command, and markets.

An economic system based on tradition allocates economic resources by custom. A dowry, in which the family of the bride gives money or property to the bridegroom at marriage, is an example of the allocation of resources by tradition. Since a woman with a large dowry attracted many potential suitors, the custom developed as a way for families to increase the likelihood that their daughter would be well provided for in the future. A different tradition developed to ensure that prestigious estates retained the family name. If inheritances were divided among the offspring, then a large, impressive estate might be reduced to a series of small, unimpressive estates in a few generations. Since it is customary in many cultures for a woman to take her husband’s family name upon marriage, any inheritance given to daughters may lose the family name. Consequently, it is traditional in many societies throughout history to pass inheritances to the first-born male child.

In an economic system based on command, one person or a small group of people allocates economic resources for a larger group of people. Fidel Castro’s direction of resource allocation in Cuba is an example of the allocation of economic resources by command. The Communist government’s allocation of resources in the former Soviet Union is another example of the allocation of economic resources by command.

A market-based economic system uses prices to allocate economic resources through the separate decisions of households and business firms. A household is a social unit comprised of those living together in the same dwelling. A business or business firm is a company that produces goods or services, usually in an effort to make a profit. A person purchasing an item from a store is an example of a market transaction. A business hiring a worker is another example.

In the real world, none of these economic systems exists in a pure form. Every economy is a combination of tradition, command, and markets.

Some countries, such as China, North Korea, and the former Soviet Union, try to rely most heavily on command for the allocation of resources. Even in these societies, however, markets play an important role. When a market is illegal, it is referred to as a black market. The name is derived from illegal activity occurring in the darkness of shadows so as not to be detected by legal authorities.

Most economies in the world rely more heavily on markets to allocate resources than on tradition and command. This is primarily because markets are more efficient.

The reunification of Germany is illustrative of the differences between societies that rely on markets versus those that rely on tradition and command. Prior to reunification, West Germany relied most heavily on markets for the allocation of its resources, while East Germany was a command-based economy. After the fall of the Berlin Wall in 1991, however, the rest of the world learned that the economic conditions in West Germany were far superior to those in East Germany.

The collapse of the Soviet Union, another command-based economy, and the movement of Russia and the Newly Independent States (NIS) toward economic systems with a greater emphasis on markets also indicate the relative efficiency of markets in allocating resources.


Economic Efficiency and Equity

The two primary criteria used to evaluate systems of resource allocation are economic efficiency and equity.

Economic efficiency occurs when a society obtains the largest possible amount of output from its limited resources. Each country in the world has labor, capital, and natural resources. Countries differ, however, in the sizes of their population (and thus their labor force) and the types and quantities of capital and natural resources. Regardless of its resource endowment, however, a society can produce some maximum quantity of output if it uses its resources wisely. This output is composed of goods and services. A good is a tangible commodity or piece of merchandise that is produced for sale, such as a car, a sweater, or a book. A service is useful labor that does not create a tangible commodity or piece of merchandise. Examples of services are haircuts, financial and legal advice, and many forms of entertainment. To illustrate the difference between goods and services, consider a vacation trip to Walt Disney World in Florida. Admission tickets to theme parks are services because they provide access to the entertainment within the park. Souvenirs, such as stuffed animals, clothing, and jewelry, are goods. Restaurants also illustrate the difference between goods and services. The reason meals cost more in restaurants than when you prepare them at home is that part of the cost of the meal is for the service of having the food prepared for you. A general name for an output is a product. A product is the output of human labor and can be either a good or a service.

Economic efficiency is an important consideration for societies that desire more goods and services. Being efficient with resources allows a society to satisfy more needs and wants than if the resources are allocated inefficiently. Economic efficiency is not the only consideration, however.

Equity occurs if a society distributes its economic resources fairly among its people. Different opinions about fairness, however, cause people to debate how resources should be allocated and are a primary determinant of political affiliation. People who think markets provide a generally fair distribution of output among the population tend to oppose government intervention in the marketplace. This is the position of most traditional conservatives, who usually favor a very limited government role in the economy. People who think markets create an unfair distribution of output tend to favor a larger role for government in the redistribution of wealth. Traditional liberals tend to favor this position.

Some systems of resource allocation may be efficient without being fair. Other systems may be fair without being efficient. Societies choose different types of political and economic systems based in large part on different perceptions and valuations of efficiency and equity.

When a society chooses to have a government, then citizens pay taxes to generate revenue for the provision of government services. Efficiency and equity are also the two primary criteria used to evaluate tax systems. This is discussed in greater detail in Chapter 10 (Fiscal Policy).


Macro versus Micro

The study of economics is traditionally divided into two fields: macroeconomics and microeconomics.

Macroeconomics is the field of economics that deals with issues that affect an entire economy, such as economic growth, unemployment, inflation, and monetary and fiscal policies. Examples of macroeconomic questions are: How can a society achieve a higher standard of living? What can the government do to reduce unemployment? Why should society care about inflation? How much influence does the government have on the economy? Are tax cuts always beneficial? Should society care about the public debt? Will entitlement social programs, such as Social Security, Medicare, and Medicaid, continue to provide the same level of benefits in the foreseeable future?

Microeconomics is the field of economics that deals with issues that affect individual markets, business firms, and households, such as market structure, profit maximization, and consumer theory. Market structure refers to the composition of a particular market. For example, it is usually beneficial to consumers if there are many producers of a product instead of a monopoly, in which there is only one seller. Profit maximization examines how a company can maximize its profits by altering its prices, output, method of production, or inputs, such as the quantity of labor employed. Consumer theory attempts to explain consumer behavior, such as how people alter their purchasing patterns when there are changes in the prices or quality of products.

Examples of microeconomic issues and questions are: Why do stores in small towns tend to charge higher prices than similar stores in places with many competitors? How many workers should a business firm hire? How much output should it make? How does the number of competing business firms affect the behavior of a company? Why does the same brand of gasoline cost different prices in various places?

Limitations of Economics as a Field of Study

Economics assumes people want more goods and services. No matter how many material possessions people have, they seem to want more. Economists have conducted surveys to determine if having more material possessions increases happiness.[ii] These studies conclude that if a family’s basic needs and wants are not being met, then having more income and material possessions does tend to increase happiness. Once a family reaches a certain income level, estimated to be about $50,000 in 2003, additional income and material possessions do not have much effect on happiness.

Occasionally, people talk about things they want that are not material, such as love, enlightenment, or world peace. The importance of these things is often ignored in economic discussions. Some people, such as monks and nuns, renounce material possessions. Introductory economics has a hard time explaining this behavior. Intermediate level microeconomics courses discuss ways to explain it, however.

Most people want a college degree so they can obtain a better job, earn more money, and buy more things. Since most people have an insatiable desire for material possessions, however, it may not be the material possessions that provide people with fulfillment. Although many people think having more material possessions will provide them with happiness, research suggests otherwise. Happiness and fulfillment in life come from other sources, such as family, friends, vocation, hobbies, or spiritual beliefs.


Positive and Normative Analysis

Economics uses two types of analysis: positive and normative. Positive analysis describes the world the way it is. It is based on facts. Normative analysis describes the world the way it should be. It is based upon opinions. Economists use both types of analysis when examining social issues and advising policymakers.

Positive analysis of economic growth includes the calculation of the value of the goods and services produced and available to satisfy our needs and wants. The value of output, if measured accurately, is a fact. Positive analysis also includes discussions of ways to increase economic growth, such as increased specialization and trade or investment in physical capital, education, and technology. Simple economic models, such as those discussed in Chapter 3, illustrate these facts. Normative analysis of economic growth might suggest that taxes should be increased to provide additional funding for public schools.

Economists demonstrate that increases in education usually increase productivity. Skilled workers produce more output than unskilled workers. Since this is factual information, this is positive analysis.

People differ, however, in their opinions about how to achieve a better-educated workforce. Normative analysis might suggest that property taxes should be increased to provide more funding for public schools. This is an opinion about how to improve education. If society chooses to devote more resources to the public school system, property taxes are not the only way to generate the necessary funds. Others might prefer a different tax structure.

An alternative normative analysis might disagree with the presumption that increased spending on public schools will automatically improve the quality of education. This is the basis behind President George W. Bush’s initiatives that require students to pass competency examinations before promotion to the next school grade level. Since this part of the analysis is based on opinions about the best way to improve education, it is normative.

A similar distinction between positive and normative analysis can be made when discussing the macroeconomic policy goal of low unemployment. Economists at the U.S. Bureau of Labor Statistics (BLS) regularly report on the condition of the U.S. labor market. Their calculations of the number of adults who are unemployed and the percentage of the labor force that wants a job but is unable to find one are examples of positive economic analysis since they are based on facts. Normative analysis might suggest that the current unemployment rate is too high and that the government should take steps to reduce unemployment. Whether the current unemployment rate is too high is a matter of opinion.

Similarly, positive analysis of inflation includes the calculation of the rate at which prices are rising, while normative analysis might suggest that the inflation rate is too high and the government should attempt to correct it.

Positive analysis of monetary policy includes a discussion of the ways the Federal Reserve System affects the economy by influencing the amount of money banks create when they issue loans. Normative analysis might suggest the Fed should do more to stimulate overall spending in the economy.

Positive analysis of fiscal policy includes a discussion of the various taxes that are used to generate revenue for the government and the ways that money is spent to provide goods and services for the public. Normative analysis might suggest that the current tax system is inefficient or unfair or proclaim that the government spends too much money on certain programs and too little on others.

Politicians often use economists as hired guns. Rather than asking economists to provide an independent analysis of a policy issue, they instead tell the economists their position on a social issue and ask economists to provide them with supporting research. This frequently results in the public being given a partial analysis, with unfavorable aspects ignored or downplayed. Politicians may also hire economists to present opinions as if they were facts. Thus it is important to be able to distinguish between positive and normative analysis when evaluating economic arguments.


Why Study Economics?

The most important reason for studying economics is to acquire an alternative way of thinking – particularly about social policies. People who lack an understanding of basic economic principles are easily misled by partial, partisan analyses. Consequently, political and business leaders frequently implement policies that are detrimental to society. You should understand basic economic ideas to avoid being deceived in social policy discussions.

The acquisition of economic perspectives has broader and more fundamental benefits, however. Economics is required at many colleges and universities because the faculties, who set the curriculum, think it is important for people to understand economic principles in order to be considered educated. Economists look at the world differently than most other people. This book is designed to provide students with an introduction to these alternative perspectives.

IMPORTANT DEFINITIONS FROM THIS ENTRY

Economics is the study of how scarce resources are allocated to satisfy seemingly unlimited needs and wants.

The economizing problem is that people’s needs and wants are seemingly unlimited, yet the resources they can use to satisfy those needs and wants are limited.

Economic resources are the things people use to attempt to satisfy their needs and wants. They can be divided into three categories: labor, capital, and natural resources.

Labor is human effort, both physical and mental.

A white-collar worker typically performs work that does not involve manual labor, is paid an annual salary instead of hourly wages, and is expected to dress with some formality.

A tangible commodity is a product that can be touched or held, such as an apple, a sweater, or a house.

A blue-collar worker typically performs work that involves manual labor, is paid hourly wages, and dresses in clothes that may become heavily soiled.

The Rust Belt is the heavily industrialized area of the upper Midwestern U.S. that contains older factories, many of which are closed.

Silicon Valley is a region southeast of San Francisco, California, which is known for its computer and other high-technology industries.

Productivity is the amount of output that can be produced in an hour of a worker’s time.

Human capital is the education, skills, and training that make workers more productive.

Entrepreneurship is the invention of new products, the improvement of existing products, or the delivery of products in better or more efficient ways.

Management is the allocation of economic resources.

Marketing is the process of informing society about products in an attempt to convince potential consumers to purchase them.

Finance is the management of money, credit, and other financial assets.

Accounting is the preparation and inspection of financial reports.

An entrepreneur is someone who invents a new product that satisfies a want or need of society, improves an existing product, or provides a product in a better or more efficient way.

A manager is someone who allocates economic resources. Successful managers are efficient in their use of labor, capital, and natural resources.

A marketer is someone who promotes the purchase or sale of a product.

The four Ps of marketing describe the marketing process: product (conception), price, promotion, and place (distribution). They are also called the marketing mix.

A financier is someone who engages in large-scale financial affairs.

A capitalist is a financier who invests in a business by providing it with significant money or other financial assets.

An accountant is someone who prepares and inspects the tax reports and other financial records of individuals or businesses.

Capital, in its broadest sense, is anything that increases productivity. Capital may also refer to physical capital, human capital, technology, or financial capital, depending on the context.

Physical capital is anything tangible and man-made that makes workers more productive.

Human capital is the education, skills, and training that make workers more productive.

Technology is the knowledge and methodology of means of production.

Financial capital is the money or other financial assets used to purchase physical capital, human capital, or technology.

Retained earnings are the portion of a company’s profits that are not distributed to the owners of the business.

A bond is a financial asset that represents a loan from the purchaser of the bond to the issuer of the bond.

A stock is a financial asset that represents a share of ownership of a corporation.

Stockholders are the owners of a corporation.

A dividend is the share of corporate profits that is distributed to each stockholder.

A natural resource is anything provided by nature that can be used to satisfy human needs and wants.

A renewable resource is capable of being replaced in a relatively short period of time.

A nonrenewable resource either cannot be replaced or its replacement requires an extremely long period of time.

Economic systems are methods of resource allocation. They can be divided into three categories: tradition, command, and markets.

An economic system based on tradition allocates economic resources by custom.

A dowry is a marriage gift of money or property from the family of a bride to the bridegroom.

In an economic system based on command, one person or a small group of people allocates economic resources for a larger group of people.

An economic system based on markets allocates economic resources through the separate decisions of households and business firms as they interact in markets for products and resources.

A household is a social unit comprised of those living together in the same dwelling.

A business or business firm is a company that produces goods or services, usually in an effort to make a profit.

A black market is an illegal market.

Economic efficiency occurs when a society obtains the largest possible output from its limited economic resources.

· A good is a tangible commodity or piece of merchandise that is produced for sale.

· A service is useful labor that does not create a tangible commodity or piece of merchandise.

· A product is a good or service that is the output of human labor.

Equity occurs if a society distributes its economic resources fairly among its people.

Macroeconomics is the field of economics that deals with issues that affect an entire economy, such as economic growth, unemployment, inflation, and monetary and fiscal policies.

Microeconomics is the field of economics that deals with issues that affect individual markets and business firms, such as market structure, profit maximization, and consumer theory.

· Positive analysis describes the world the way it is.

· Normative analysis describes the world the way it should be.

[i] Fossils are the remains and geological impressions of plants and animals that were buried millions of years ago. Over time, the weight of the rock and mud covering this organic matter created enough pressure and heat to convert the organic matter into oil, coal, and natural gas. Thus, these energy sources are called fossil fuels.

[ii] See Kluger, Jeffrey. “No Price Tag on Happiness.” TIME. September 8, 2003 and Chatzky, Jean. “Money Can’t Buy It.” TIME. October 6, 2003.

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