Dealing with the Economic Problem

The study of how people fulfill their unlimited wants in a world where resources are scarce 

Economics:

Inputs used to produce a good (coffee cup, remote) or service (acts like teaching or cutting hair)  that people want,  AKA G/S

Resources/”factors of production”

Four factors of production

Labor, land, capital, Entrepreneurial-ability

• Labor:

• physical/mental effort used to produce g/s

• Land:

• includes all natural resources used to produce g/s 

• Capital:  

• aids and the tools used to produce a g/s 

buildings, tools/machines/equipment/work space

• Physical Capital:

acquired knowledge and skill 

• Human capital

managerial skills necessary to start a firm, WITH a willingness to take risks

• Entrepreneurial-ability:

• When a resource/factor of production is not available in sufficient quantities to satisfy all the various ways a society wants to use it 

• Scarcity 

latin for all things constant (limiting our variables)

Ceteris Paribus

• the economy as a whole

  • Unemployment rate in the entire economy 

  • Price of all goods and services

Macroeconomics

• when two or more economies interact with one another

  • Trade with the USA and Great Britain 

• International–

• Positive and normative economics 

• Positive statements are facts or data-driven 

• Normative statements are opinions or subjective 

• People have unlimited wants but limited resources, so they must make choices 

• There is no such thing as a “free lunch” –nothing in life is free 

Assumption

–individuals (firms, govts, etc) look for and pursue opportunities to increase their utility (happiness) 

• Rational pursuit of self-interest

Method for finding the optimal amount of any activity by weighing the additional benefits and the additional costs 

Marginal analysis

• -rewards, or punishments that motivate individuals to make particular choices

Incentives

• when you give something up in order to get something else 

Trade-offs

time and info gathering required to make a rational decision

• Transaction costs/ “shoeleather costs”—-

• costs that have already been incurred and can’t be recovered 

Sunk costs

• value of the NEXT best alternative forgone when a decision is made 

opportunity cost (OC)

• a theory from Adam Smith (coined the term capitalism) 

• That if everyone is following their rational pursuit of self-interest, society as a whole will benefit  

  • Market failure can exist, and the theory will not work 

Theory of the invisible hand

• What are we going to produce?

• How are we going to produce it?

• For whom are they producing? 

• Economic Problem Questions 

• THE UNITED STATES IS A _________ ECONOMY 

mixed

• Four sectors/decision makers

Households Firms Government (all levels, federal, local, and state) Rest of the world

• Anyone who lives within the same dwelling 

• HH (abbreviation) 

• Own all factors of production (land, labor, capital, and entrepreneurship ability) 

Household

• Business (any type of business) 

firms

• (all levels, federal, local, and state) 

  • Decision maker 

  • Gov’t (abbreviation)

Government def

• Any economy outside our own 

• ROW (abbreviation) 

Rest of the world

• is where buyers and sellers meet together to carry out a mutually beneficial exchange 

marke

Types of markets:

• Factor/resource market

  • Factors of production are exchanged

• The product market 

  • goods and services are exchanged

• Financial market

  • Where financial assets are exchanged (investments)

• a curve showing alternative combinations of production choices if resources are used fully and efficiently

PPC:

• a condition that exists where there is no way resources can be recombined to increase the production of one good without decreasing the production of another 

Efficiency

• Productively efficient (definition of efficiency) 

has to be productively efficient  beyond that, resources are also going to their higher valued use (need to know somebody's opinion)

• Allocatively efficient:

• PPC Assumptions:

1. Specific amount of time

2. Limit variables (always two in our class) 

3. Resources are fixed in quantity and quality 

4. The level of technology is fixed 

5. “Rules of the game” fixed 

What is International TradE

The lifeblood of the global economy 

• the difference between a country's imports and exports

Netports

• Based on labor costs, the imported materials are cheaper in the USA

• Economic theory suggests that international trade reshuffles jobs from one sector of the economy to another 

TRADE DECITS

• drop trade barriers, increase US trade deficits, and decrease manufacturing jobs 

  • Free trade decreased the prices of consumer goods

  • Industry workers were TREATED HORRIBLY

NAFTA

• policies, such as placing high tariffs on imports and limiting the number of foreign goods, usually hurt an economy 

Protectionism

•  effective in getting countries to agree to specific rules and help settle trade disputes

World Trade Organization

• How much your currency is worth when you read it for another country's currency 

EXCHANGE RATE

• Every country has an accounting statement called the balance of payments that records all international transactions

• Balance of Payments

• records the sale and purchase of goods and services, investment income earned abroad, and other transfers like donations and foreign aid 

Current Account

•  records the purchase and sale of financial assets like stocks and bonds 

Financial accounT

• A theory that Countries benefit from producing one good or another (specializing)

Adam Smith: Specialization

• 4 benefits of specialization or divided labor

1. Individual preferences can be expressed 

2. Gain expertise 

3. Reduce transaction costs

4. Possibility of introducing entertainment or more technological or capital

• David Ricardo: Law of Comparative

• Specialize in the product where the country has a comparative advantage (lower OC)

  • Davide to gain an additional peach, give up 4/3  fish (BAD) 

  • Allison should produce peaches since she gives up ½ a fish 

  • David should produce fish because he loses ¾ fish  (GOOD)

he ability to consume outside the PPC curve.

Gain from trade:

• • Needs to be rooted between our OC

• Terms of Trade