Unit 1: Fundamentals of Economics

Scarcity

All resources are limited

Economics

The study of scarcity and how humans make decisions individually & collectively to best use the limited amount of resources & time available

Wants VS Needs

Wants: things you can live without

Needs: Things that you have to have to stay alive

Trade-Offs

Choosing between 2 things and giving up the other

Opportunity Cost

The value of the thing not chosen/given up in a trade-off

Factors of Production

The resources people use to produce goods/services

Land

Includes physical land where businesses, farms, or factories are located AND natural resources

Labor

The effort and skills of people who work to produce goods and services

Capital

Capital: Money

Capital Goods: Buildings, tools, machines, what is needed to produce goods/services

Entrepreneur

Provides the ideas, organization, and leadership to bring land, labor, and capital together to create goods and services

Three Economic Questions

1. What should Get produced

2. How should it be produced

3. Who gets what is produced

Market Economy

Economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

Command Economy

Economic system in which the central government makes all decisions on the production and consumption of goods and services

Mixed Economy

Economic system that combines traditional and the free market with varying level of government involvement

Traditional Economy

An economic system that relies on traditional customs, beliefs, or culture to decide what is produced and consumed

Adam Smith

• Published the “Wealth of Nations”

• Stated that people make economic choices based on self-interest NOT for the good of society

Karl Marx

• Published the “Communist Manifesto” and “Das Kapital”

• Marx’s Ideas are also called Marxism/communism

• Pointed out the value of labor and critiqued capitalism saying that it exploited labor

• Also said that labor (the proletariat) will rise up to overthrow the business owners (bourgeoisie) and establish and egalitarian, socialist society

John Maynard Keynes

• Was at WWl Versailles Treaty negotiations and spoke out against harsh reparations

• Keynesian Economics: A government need to intervene in times of great economic distress

Circular Flow

An economic model that illustrates how money moves from producers to consumers and back again in an endless loop

Production Possibilities Curve

• A graph that shows the different combinations of two goods that can produced using all factors of production

• Inefficient/Underutilized - a point inside the curve

• Efficient - A point on the curve

• Impossible - A point outside the curve

• Curve shift to the right - production capacity has increased due to more workers, improved technology, and more land

• Curve shift to the left - production capacity has decreased due to less workers. less resources, and natural disaster