Economics Unit 1

What is the fundamental economic problem facing all societies?

Scarcity. It is the condition where unlimited needs and wants collide with limited resources

How do you define Scarcity in economic terms?

It occurs when Demand > Supply. It is not just about a resource being rare; it’s when there isn’t enough of it to satisfy everyone who wants it.

Need

Something required for survival or basic functioning, like food, water, or shelter

Want

A luxury that satisfies a person's desires but is not necessary for survival

Why is "TINSTAAFL" an important economic concept?

It stands for "There Is No Such Thing As A Free Lunch." It means every choice has a cost—even if it seems free, there are hidden costs or, at the very least, an opportunity cost.

What are the four "Factors of Production" (resources needed to produce goods)?

Land, Labor, Capital, Entrepreneurs

Land

Natural resources not created by humans

Labor

Human effort, skills, and abilities

Capital

Tools, equipment, and machinery used in production.

Entrepreneurs

Risk-takers who combine the other three factors to start businesses.

Explain the Circular Flow of Economic Activity.

It shows the interdependence between businesses and individuals (Factor and Product Market)

Factor Market

Where individuals sell their labor/resources to businesses.

Product Market

Where businesses sell finished goods and services to individuals.

What does the line on a PPC represent?

Maximum efficiency. It shows the most a society can produce using all its resources.

What does the movement along a curve represent on a PPC graph?

Represents Opportunity Cost (giving up some of one product to get more of another)

What does a dot inside the curve represent on a PPC graph?

Represents Inefficiency or underutilized resources (like high unemployment)

What does an outward shift (the whole curve moves right) represent on a PPC graph?

Represents Economic Growth caused by better technology or more resources

What does an inward shift (the whole curve moves left) represent on a PPC graph?

Represents a loss of resources, such as from war or natural disaster

What are the 3 basic questions every economic system must answer?

1. What to produce? 2. How to produce? 3. For whom to produce?

What are the three main systems that deal with scarcity?

Traditional, Command, and Market Economies

Traditional Economy

Based on customs, hunting, and farming passed down through generations

Command Economy

The government makes all major economic decisions and owns most resources

Market Economy

Driven by the "Invisible Hand" (supply and demand) and the mutual consent of buyers and sellers

What goals do Command Economies prioritize?

Equity (fair distribution) and Security (safety nets)

What goals do Market Economies prioritize?

Freedom (individual choice), Efficiency, and Growth.

What are the "5 Pillars" of Free Market Capitalism?

Private Enterprise, Competition, Private Property, Profit Motive, Voluntary Exchange

Private Enterprise

Economic Freedom. Individuals choose how to use resources

Competition

Keeps prices low and quality high

Private Property

People have the right to own and control their possessions

Profit Motive

The incentive to improve one's material well-being

Voluntary Exchange

Buyers and sellers freely engaging in market transactions.

Private Goods

Manufactured/sold by private companies for profit (e.g., clothes, cars). Access is limited to those who can pay

Public Goods

Provided by the government for everyone (e.g., police, roads, national defense). They suffer from the "freeloader problem"

Absolute Advantage

A country can produce more of a product or produce it at a lower cost.

Comparative Advantage

A country can produce a product at a lower opportunity cost. This is the primary reason why countries trade.

Protectionism

Policies designed to protect domestic industries from foreign competition (Tariffs, Quotas, Embargos)

Tariffs

Taxes on imported goods

Quotas

Limits on the quantity of a product that can be imported

Embargos

Complete prohibition of trade with a country

Trade Deficit

When the value of imports exceeds exports

Trade Surplus

When the value of exports exceeds imports

Mixed Market

Primarily private ownership and profit-driven, with some government regulation and public goods

Mixed Socialist

The government owns or controls major industries (e.g., oil, utilities) while allowing some private business

What is Privatization and why does it occur?

Privatization is transferring a government-run service to the private sector. It is often done to increase efficiency through the profit motive.

Absolute Advantage

When a country can produce more of a product or produce it at a lower absolute cost (usage of resources)

Comparative Advantage

The ability to produce a product at a lower opportunity cost.

What are the primary arguments FOR Protectionism?

To protect domestic jobs, aid in national defense, protect emerging industries, and keep money within the domestic circular flow.

Why does Free Trade generally lead to economic growth?

It allows countries to utilize their comparative advantages, leading to a more efficient use of global resources, lower prices for consumers, and increased variety of goods

What is the "Paradox of Value" and how is it explained?

The Paradox of Value is the contradiction when something of more societal value has a lower economic price that something of less societal values (explains why a diamond can cost more than water)

What does something have to have in order to have value?

It must be scarce and have utility (usefulness). Water is useful but plentiful; diamonds are less useful but extremely scarce.

Productivity

A measure of the amount of output produced by a given amount of inputs in a specific period of time. It increases when more is produced with the same resources.

Economic Growth

Occurs when a nation’s total output of goods and services increases over time. This is represented by an outward shift of the PPC.

Who was Adam Smith and what were his key contributions?

He introduced The Invisible Hand, Laissez-Faire, and Division of Labor

Division of Labor

Breaking down jobs into small tasks to increase productivity.

Laissez-Faire

The philosophy that the government should not interfere in the economy.

Demand

The ability and willingness to buy a product at various prices

Supply

The amount of a product that producers are willing and able to bring to market at various prices at a given time

What happens when Demand > Supply?

Prices go up (shortage)

What happens when Supply > Demand?

Prices go down (surplus)

What are the primary "Economic Goals" of a society?

Societies must choose which to prioritize: Freedom, Efficiency, Equity, Security, Full Employment, Price Stability, and Economic Growth.

Free Enterprise

An economy where privately owned businesses operate for profit with limited government intervention

Private Property Rights

The feature of capitalism that entitles people to own and control their possessions as they wish. This provides the incentive to work, save, and invest.

Nationalization

When the government takes over a private industry (e.g., the government taking control of all healthcare or airlines)

What is the WTO and what is its purpose?

The World Trade Organization is an international agency that administers trade agreements, settles trade disputes between nations, and organizes trade negotiations.

NAFTA (North American Free Trade Agreement):

Created a massive free-trade zone between the US, Canada, and Mexico by reducing tariffs and quotas

USMCA (United States-Mexico-Canada Agreement)

The "new NAFTA." It updated trade rules, specifically regarding digital trade, labor laws (especially in Mexico), and the percentage of auto parts that must be made in North America to be tariff-free.