Economics Unit 1

Economics

the study of how individuals & societies satisfy their unlimited wants with limited resources

Needs

Things we must have in order to stay alive (food, water shelter)

Wants

Things we don't really need but would like to have

Shortage

-Demand is greater than supply

-Usually temporary

Scarcity

-Exists when there are not enough resources to satisfy human wants

-Never ends

Incentives

Benefits that encourage people to act in certain ways (example: free wifi)

Utility

Satisfaction received from using a good or service (Example: Cell phone

Trade-off

The alternative people give up when they make a choice (Example: Because you chose to come to school today, you cannot: work, sleep in, hang out with your friends, watch movies, etc. )

Opportunity Cost

What you give up to get what you want

- The value of the next best alternative a person gives up (If working is what you choose instead of school, then your opportunity cost is the hours worked or pay you would receive)

Mixed economies

have features of more than one type of system (transitional, command, market)

Economic System: Command (centrally planned economy)

- All societies, government exerts some control over people's lives

- In centrally planned economy, government exerts great control

- Determines which businesses should operate & the amount of produced each month

- determines who is employed, the work hours, & the pay scales

- wants of individuals consumers rarely considered

-government owns the means of production: resources and industry

-Government makes economic decisions

- Government sets wages (determines who can buy certain products)

Economic System: Traditional

- Families or tribes make decisions

- Decisions based on beliefs

- Goal is survival

- Everyone has a set role, and the role cannot be changed

- Good of the group comes first before Indvidual wants

Traditional economy advantages and disadvantages

Advantages: rarely disagree over goals, roles

Disadvantages:

-Resistant to change

- Less productive

(Under pressure to change)

Economic System: Market

driven by choices of consumers and producers

- consumers and producers benefit each other when they act in self-interest

Main features of Market Economy

- Private property and markets

- Limited government involvement

- Voluntary exchange markets

- Competition and consumer sovereignty

- Specialization and markets

Advantages of a market economy

- individuals free to make economic choices

- Less government control

- locally made decisions

- profit motive

Disadvantages of a market economy

- no way to provide public goods and services

- does not give security to sick or aged

- U.S. industrial boom made business owners rich, gave workers low pay

- businesses did not address problems caused by industrialization

- industrialization societies adopt some government control of economy

Economic System: Mixed

has elements of traditional, command and market systems (most common type of economic system)

Government in the U.S. economy (modified free enterprise)

- Circular flow model - like businesses and households, government is producer and consumer

- collects taxes in payment, uses these to pay for recourses, products

Economies in transition often go through changes in ownership:

Nationalize - more government/public ownership and less private ownership

Privatize - less government/public ownership and more private ownership

Karl Marx

19th century German philosopher, historian, economist

- Wrote the Communist Manifesto (with Friedrich Engels)

Free Enterprise System

Economic system based on private ownership of productive resources

- Called free enterprise system because in it anyone is free to start a business or enterprise

- Profit motive is incentive for starting a business or enterprise

Cental Idea: Market should be free to operate in all fields

Government's role: control inflation with the money supply

Milton Friedman

promoter of free market (Won 1976 Nobel Prize for Economics)

Key features of Free Enterprise

open opportunity, legal equality, free contract

Revenue Formula

Profit \= Revenue - Cost

A market economy allow people to

specialize in what they do best

- encourages efficient use of resources

- lead to higher-quality, lower-priced products

Consumer sovereignty (Fundamentals of a market economy)

buyers choose products, controls what is produced (producers will create products consumers demand)

Public Goods

Provided by government, consumed by public (example: public goods funded with taxes)

Circular Flow Model (In market economies)

illustrates how interactions occur in a market

- Represents the two key decision makers: households, businesses

- Shows the two markets where households and businesses meet (-goods and services (product market) -Resources (factor market)

Capitalism (fundamentals of market economy)

private ownership of factors of production

Laissez Faire (fundamentals of a market economy)

government should not interfere in economy

Competition (fundamentals of a market economy)

controls self-interests behavior. it helps keep prices low and forces producers to make better products

Goods

items that people buy, such as food and clothing

services

work that one person does for another for a fee, such as plumbing and hair styling

scarcity affects the choices of both the

consumer and producer

consumer

person who buys good or services for personal use

producer

person/business ho makes goods or provides services

Scarcity leads to three economic questions:

1. What will be produced? How much will be produced (A society must decide on the mix of goods and services it will produce. Goods and services chosen will depend on natural resources available)

2. How will it be produced? (Scarce resources will be used in the most efficient way to satisfy society's wants. Methods of production will be influenced by natural resources available)

3. For whom will it be produced? (How goods and services are distributed to the people involves 2 questions: How much should people get? How will goods and services be delivered to them?)

Factors of Production

the economic resources needed to produce goods and services

Cost-benefit analysis

examination of costs, expected benefits of choices

Sunk Cost Fallacy

Sunk cost are past cost that are irrelevant to decision making

Marginal

a little bit more or a little bit less

Economic models

representations that hep simplify and organize data

Production possibilities curve (PPC)

is a graph that illustrates the maximum number of goods or services that can be produced using limited resources

PPC (Production possibilities curve) is based on four assumptions that simplify economic interactions:

- resources are fixed

- all resources are fully employed

- only two things can be produced

- technology is fixed

efficiency

producing the maximum amount of goods and services possible (point on curve)

underutilization

producing fewer goods and services than possible (point inside the curve)

Increased production is shown on the PPC as a

shift of the curve outward

Increase in total output is called

economic growth

statistics

numerical data or information (shown patterns of human behavior)

microeconomics

study of individuals, families & businesses in an economy

macroeconomics

study of the economy as a whole & is concerned with large-scale economic activities