ECON U1 - Economic Foundations

Economics

the study of how people make decisions in a world of limited resources

Scarcity

the fact that we do not have enough resources (water, food, money, time) to satisfy everyone’s needs and wants

Goods

tangible objects that we use to satisfy our wants and needs

Durable Good

a good that can be used repeatedly, or yields benefits over a long period of time

Non-durable Good

Goods that either can only be used once, or yield a benefit for less than three years

Services

work that is performed for someone else

Cost- Benefit Analysis

(My definition) Looking at all the possible decisions and weighting all the costs and benefits of each. It is ideal to choose the decision that has the most benefits (Benefits > costs)

Utility

the total satisfaction received from a choice

Trade Offs

(my definition) The time you COULD have spend doing something else, rather than the option you chose. / It is the situation itself

Opportunity Cost

(my definiton) The BEST alternative you have other than your first choice, and its value

Four Factors of Production (CLEN)

1. Natural resources

2. Labor, people working

3. Capital and Capital Goods

4. Entrepreneurs

Production Possibilities Curve (PPC)

(my definiton) The combination of products that could be made with given resources, technology, and time

• showing opportunity cost

inefficient point, (could make more of either product)

the point on the inside of the line (to the left). Can make more of either product

Unattainable point

the point on the outside of the line (to the right). It is impossible to make this amount of either product at the same time due to given resources.

Reaching the unattainable point

Increasing productivity, technology, and resources. the graph shifts RIGHT

Point of maximum product production of the PPC

Point exactly on the line of the graph (in any part of the line)

The Three Fundamental Questions

of Economics

1. What to Produce

2. For Whom to Produce

3. How to produce

Traditional Economy

Decisions are made based on customs and community leaders (chiefs, elders) or a person’s family background may determine their profession.

• ex.) tribes, amish, medieval

• ex.) community leaders, elders, chiefs

Market Economy (Capitalism)

an economic system in which private individuals own and decide how to use the Factors of Production. Individuals have complete freedom to decide how the fundamental questions are answered.

• no examples

Socialism

an economic system where no one really owns the Factors of Production. The community owns them, and decisions are made through people working together to decide what is best for the most people. “The Common Good”

Command Economy (Economic Communism)

an economic system in which the government owns and decides how to use the Factors of Production.

• North Korea

Mixed Economy

economic system in which both individuals and the government play a role in decision-making.

• US, everywhere else

Adam Smith

(my definition) The father of modern capitalism. Thought the best way to manage the economy was for the govt. to leave it alone, and allow it to fix itself

The 6 Aspects of Capitalism (CEPPCV)

Consumer Sovereignty, Economic Freedom, Private Property Rights, Competition, Profit Motive, Voluntary Exchange

Consumer Sovereignty

The consumer is king; they are the ones who determine what will be produced because they determine what they want to buy.

Economic Freedom

Individuals and businesses have the freedom to decide what to produce or buy, and what job to have. Must deal with consequences of our decisions

Private Property Rights

People and businesses have almost complete control of how to use their own property. This gives us an incentive to work because we have control of what we gain by working.

Competition

Struggle between buyers and sellers to get best products at lowest prices. Competition is good for consumers because it results in higher quality products and lower prices.

Profit Motive

individuals have the right to risk their property and money in order to make a profit. If they do well, they get to keep what they make. If they do poorly, they will lose their money.

Voluntary Exchange

both buyers and sellers agree to any transaction that is made; no one is forced to buy or sell anything by the government.

Ways to increase productivity

Specialization, Division of Labor, Invest in Human Capital

Specialization

people and businesses focus on one thing they do well

Division of Labor

specialize within a certain job. Think assembly lines!

Invest in Human Capital

invest in training and motivation to increase productivity of workers

Economic Interdependence

we rely on others and others rely on us to fulfill wants and needs. Events in other countries, regions, or businesses can have a major effect on everyone

globalization