Economics

What is Economics?

The study of how people satisfy their wants and needs by the choices they make

Scarcity

• People have unlimited wants and needs but have limited resources

• Forces people to make choices in how to allocate (distribute) their resources effectively to get what they want

Microeconomics

The study of choices of households, companies, and individual markets

Ex. Cell phone market

Macroeconomics

The behavior entire economies (nations)

Ex. Inflation, unemployment, GDP

The 3 Basic Economic Questions that Determine a Societies Economic System is…

1. What goods and services should be produced?

• What products/services does society need/want?

2. How should these goods and services be produced?

• What combination of factor resources should we use? What methods? Protection for employees or consumer safety?

3. Who consumes these goods and services?

• How will income be distributed? Safety nets?

Who makes Economic Decisions?

Consumers, Producers, Government

Consumer Goods

Physical objects

Ex. Pizza, car, shoes

Consumer Services

Actions or activities performed by a fee

Ex. Lawyer, hairstylist, cab driver

Natural Resources (land)

Items provided by nature, in the Earth or the Earth’s atmosphere, that can be used to produce goods and services

Human Resources (labor)

Any human effort that goes into the production of a good or service. Can be physical or intellectual

Capital Resources

Manufactured materials used to create products, including capital goods and the money used to purchase them

Capital Goods

The buildings, structures, machinery, and tools used in the production process

Entrepreneurship

• Assembles the factors or productions

• Takes the necessary risk in starting a new business or developing an innovative product or service

Trade off

One good thing is sacrificed for another; the sacrifice is a trade off

Opportunity Cost

The value of the next best alternative given up to obtain an item including the time, money or any opportunities lost associated with it. All are trade offs but only the 2nd best choice is the opportunity cost

Production Possibilities Curve (PPC)

Shows all the possible combinations of 2 goods or services

• Fixed resources

• Maximum efficiency

Current Production Possibilities Curve

Shows the possible production options that would be available if a company concentrated their resources on 2 possible alternatives

Productivity

The level of output that results from a given level of input

Efficiency

The use of the smallest amount of resources to produce the greatest amount of output

Economic Growth

• the curve “shifts to the right” to slow new production possibilities when…

1. Increases in quality or quantity of resources (population, labor participation, immigration, physical capital)

2. New Technology (software, robotics, innovation and invention)

3. Increases in Human Capital (training, education)

Product Market

The transfer of goods and services in exchange for a money payment (revenue)

Factor Market

The transfer of resources like land, labor, and capital in exchange for a money payment (rent, wages, interest, profit)

Who was Adam Smith?

• An 18th-century Scottish philosopher and economist (1723-1790)

• Argued a nation’s wealth is measured by its total productivity/goods and services (an early version of GDP), not by how much gold or silver sits in a royal vault

• Viewed self-interest as practical prudence and natural human drive, kept in check by competition and social empathy (from his moral philosophy)

What are key books of Adam Smith?

The Theory of Moral Sentiments (1759) - Focuses on human ethics, empathy, and social bonds

The Wealth of Nations (1776) - His major work that launched modern economic theory

What did Adam Smtih advocate for?

What did Adam Smtih advocate for?

Free trade, open competition, and letting supply and demand set prices rather than government intervention.

• In his time, governments practiced mercantilism (hoarding gold, placing heavy tariffs, and strictly controlling trade)

Adam Smith’s idea of government

• Did not believe in zero government

• Government should enforce laws, protect private property, run the legal system, provide national defense, and build public works (like roads, bridges, and education) that private businesses wouldn’t handle