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Economics
the study of how people deal with scarcity; the study of decision-making
Needs
the things that a person has to have to survive. Food Water Shelter
Wants
those things that you would like, but do not need to survive
scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
The result of scarcity
we need to make choices
Trade Off
When you choose between two possible uses for a resource, giving up one alternative for another
Opportunity cost
The most valuable choice (in terms of money, time, goods and services given up) available that you DID NOT choose
goods
Physical objects such as clothes or shoes
services
actions that a person performs for another person that satisfies a want or need
3 Basic Economic Questions
What goods and services will be produced? How will the goods and services be produced? Who will receive / benefit from goods and services produced?
resources
the materials from which goods and services are made
factors of production
the resources that are used to make goods and services
human capital
the knowledge and skills that workers acquire through education, training, and experience
natural resources
Materials or substances such as minerals, forests, water, and fertile land that occur in nature and can be used for economic gain
"land"
nickname for natural resources
"labor"
nickname for human resources
efficient
Production levels are set at a point on the PPF.
Achieving maximum productivity with minimum wasted effort or expense
inefficient
Production levels are set at a point within the boundaries of the PPF.
Traditional economy
An economic system in economic decisions are made based on customs and traditions and economic roles are typically passed down from one generation to the next.
Command economy
An economic system in which the government makes all economic decisions.
Market economy
An economic system in which economic decisions are made by private individuals and private businesses.
What are the advantages of a traditional economy?
All members of the community have economic roles (no unemployment)
Stable, predictable, and continuous life
What are the disadvantages of a traditional economy?
Discourages new ideas and new ways of doing things
Stagnation and lack of progress
Lower standard of living (in terms of GDP, not necessarily in terms of happiness)
What are some examples of a traditional economy?
some Inuit communities
many Amish communities
any hunter / gatherer communities remaining
What are the advantages of a command economy?
Capable of dramatic change in a short time
Many basic education, public health, and other public services available at little or no cost
What are the disadvantages of a command economy?
Does not meet wants and needs of many consumers
Lacks effective incentives to get people to work
Requires large bureaucracy, whic consumes resources
Has little flexibility to deal with small, day-to-day changes
New and different ideas discouraged, no room for individuality
What are some examples of a command economy?
North Korea and Cuba
What are the advantages of a market economy?
Able to adjust to change gradually
Individual freedom for everyone
Lack of government interference
Decentralized decision making
Incredible variety of goods and services
High degree of consumer satisfaction
What are the disadvantages of a market economy?
Pure market economy has no way to provide public goods and services; does not give security to sick or aged; during U.S. industrial boom, business owners became rich, workers low pay; businesses did not address problems caused by industrialization; Industrialized societies adopt some gov control of economy
What are some examples of a market economy?
Closest examples are:
Hong Kong
Singapore
Why does each country have its own unique economic system?
Because every country has differing needs and wants based on differing cultural priorities and differing environmental needs, each country answers the 3 economic questions differently.
Characteristics of American Free Enterprise
Economic Freedom, Private Property, Voluntary Exchange, Contracts, Self Interest, Competition, Profit Motive
Productions Possibility Curve
a graph that shows alternative ways to use an economy's resources
public good
a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.
free rider
someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good
Competition
The regulating force of the economy
Self-interest
the motivating force in the free market
profit motive
what drives entreprenuers to risk their land labor and capital
eniment domain
Power of a government to take private property for public use. In America the government must pay you.
5th Amendment
Where eniment domain and due process are found
Lots of land, many natural resources, consistent flow of diverse mimigrants
Reasons for America's success early on.
To focused on heavy industry
reason Soviet Communism failed in the end.
economic equity
Equal outcome for everyone in the economy
economic equality
everyone has the same opportunity to succeed or fail
Physical Capital
the human-made objects used to create other goods and services
Micro economics
the part of economics concerned with single factors and the effects of individual decisions.
Macro economics
the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
thinking at the margin
the process of deciding how much more or less to do
law of increasing costs
as we shift factors of production from making one good or service to another, the cost of producing the second item increases
invisible hand
A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all
Laissez-faire
Idea that government should play as small a role as possible in economic affairs.
Full employment, Steady growth, Stability
Goals of the government in regulating the economy
Households
-own the factors of production, sell/rent them to firms for income -buy and consume goods and services
Firms
buy/hire factors of production, use them to produce goods and services; sell goods and services
Factor Market
market in which firms purchase the factors of production from households
Product Market
the market in which households purchase the goods and services that firms produce
revenue
incoming money
Costs
The expenses involved with manufacturing, promoting, and distributing a product
