Unit 1: Basic Economic Concepts

Economics

the science of scarcity and study of choices a social science about using limited resources in the most efficient way to get the most satisfaction possible.

Scarcity

our wants are unlimited, but our resources (time, money, materials, workers, land, etc.) are limited.

Because of scarcity

we cannot have everything we want, so we have to make choices.

Microeconomics

small picture (individuals, families, small businesses).

Macroeconomics

big picture (whole country, economy as a whole).

Economists use

the scientific method:

the scientific method:

1. Look at real-world data.

2. Make simplified models (like pretend versions of the world).

3. Create theories to explain and predict behavior.

Theoretical economics

making theories from scientific methods

policy Economics

applying theories to fix problems.

Positive Statements

facts, no opinions. (“The unemployment rate is 6%.”)

Normative Statements

opinions, what “should be.” (“The government should lower unemployment.”)

Marginal

“extra” or “additional.”

Marginal thinking

People think about whether doing one more of something is worth it. Compare marginal benefit with marginal cost

marginal benefit

extra good stuff you get

Marginal cost

(extra sacrifice)

Economists are like doctors:

• Theoretical = diagnosing the illness.

• Policy = giving the medicine.

Rational people only do something if

marginal benefit ≥ marginal cost.

Five Key Economic Assumptions

scarcity, trade off, every one acts in self interest, weigh marginal costs vs. benefits, We can use models and graphs to explain real-world situations.

scarcity

People’s wants are unlimited, but resources are limited

trade-off

 all the options you give up when you choose something. Because of scarcity, choices must be made. Every choice has a cost

Why does Everyone acts in their own self-interest

To maximize satisfaction.

Opportunity cost

 most valuable thing you gave up

The real cost of something

what you give up to get it.

What PPC shows

The maximum possible combinations of two goods an economy can produce with limited resources.

Assumptions About ppc

1. Only 2 goods produced.

2. Resources fully employed.

3. Resources are fixed.

4. Technology is fixed.

Key ideas from PPC:

Scarcity, Trade-offs, Opportunity cost, Efficiency

Scarcity In ppc

can’t produce beyond the curve

Trade offs in ppc

moving along the curve means giving up some of one good for another

Opportunity cost In ppc

how much of one good you give up to get more of the other.

On the curve

productively efficient.

Inside curve efficiency

inefficient (waste)

Outside curve Efficiency

unattainable (not enough resources yet).

Types of oppurtonity cost in ppc

Constant opportunity cost and Increasing opportunity cost

Constant opportunity cost

straight line PPC (rare).

Increasing opportunity cost

bowed-out PPC (realistic, because resources aren’t equally good at producing both goods).

Shifts of the PPC

More resources (like new workers), Better technology, Trade, Disasters/loss of resources, the Unemployment? Just a point inside the curve (not a shift).

More resources (like new workers) ppc

curve shifts outward in ppc

Better technology PPC

curve shifts outward in ppc

Trade

allows consumption beyond PPC.

Disasters/loss of resources

curve shifts inward. In ppc

Circular Flow Model

Shows how money, goods, and resources move in the economy

Households circular flow

own resources, sell labor, buy goods.

Businesses Circular flow

hire labor, produce goods.

Government Circular flow

collects taxes, provides services.

Absolute advantage in trade

who can make more with the same resources.

Comparative advantage in trade

who gives up less (lowest opportunity cost).

 

Trade rule

Countries should specialize in goods with lower opportunity cost, then trade.

The first Principle of Economics

People face trade-offs

The second principle of economics

The cost of something = opportunity cost.

The third principle of economics

Rational people think at the margin.

The fourth principle of economics

People respond to incentives.

How people make decisions

First four principle of economics

How People Interact

5-7 of principles of economics

The fifth principle of economics

Trade can make everyone better off.

The sixth principle of economics

Markets usually organize activity well (invisible hand)

The 7th principle of economics

Governments can sometimes improve outcomes

How does Governments can sometimes improve outcomes

fix market failures, enforce property rights, reduce inequality).

How does the economy work as a whole

8-10 of the principles of economics

The eighth principle of economics

Standard of living depends on productivity.

The ninth principle of economics

Prices rise when too much money is printed

Inflation

Prices rise when too much money is printed

The tenth principle of economics

In the short run, there’s a trade-off between inflation & unemployment

Philips curve

In the short run, there’s a trade-off between inflation & unemployment

Efficiency

getting the most out of your scarce resources.

Equality

distributing the pie fairly among members of society.

Incentives

rewards or punishments that push people to act.

The Invisible Hand

when individuals act in their own self-interest, they often unintentionally promote the good of society as a whole.

Constant Opportunity Cost

Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost (forgone production of another good) will increase

Productive Efficiency

Products are being produced in the least costly way. This is any point ON the Production Possibilities Curve

Allocative Efficiency-

The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society.

Economic Systems

1. Centrally-Planned

(Command) Economy

2. Free Market Economy

3. Mixed Economy

Centrally-Planned Economies

Communism

centrally planned economy the government

1. owns all the resources.

2. decides what to produce, how much to produce, and who will receive It

Free Market System

Capitalism

Free market economy

Little government involvement in the economy.

(Laissez Faire = Let it be)

2. Individuals OWN resources and answer the three

economic questions.

3. The opportunity to make PROFIT gives people

INCENTIVE to produce quality items efficiently.

4. Wide variety of goods available to consumers.

5. Competition and Self-Interest work together to

regulate the economy (keep prices down and

quality up