Introduction to Economics

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