Intro to Economic Part two

Three Basic Economic Questions

1. What is g/s will be produced

2. How will g/s be produced

3. For whom will goods and services be produced?

Society

Guns or Butter

Business

The interaction of individual buyers and sellers based on resource available

Four Factors of Production

Land, Labor, Capital, and Entrepreneurship

Land

All natural resources

Labor

Efforts a person devotes to a task for which they are paid

Capital

All human/human made resources used to produce other goods and services

Physical Capital

Human made objects used to create other goods and services

Human Capital

Skills and knowledge gained by a worker through experience

Labor Intensive

Use more labor than machines

Capital Intensive

Use more machines than labor

Entrepreneurship

The skill in acquiring and managing Land, Labor, and Capital.

For whom will goods and services be produced DETERMINED BY

Consumers and prices

Consumers

Preferences and spending habits

Economic systems

The combination of social and individual decision making a society uses to answer the three basic economic questions.

Four types of Economic Systems

Traditional, Command, Market, and Mixed Economy.

Traditional Economy

The Three Questions decided by social customs habits and ritual.

-Most Stagnant little room for change (farming, hunting, and gathering.)

-Lack of safety nets

-Family Unit→Central

-Gender Lines→Labor

Command (centrally planned) economy

The Three Questions decided by the Government.

-The government controls of land and labor.

Market Economy

The Three Questions decided by individuals consumers and producers in the economic arena.

Specialization

Concentration of productive efforts of individuals and firms on a limited numbers of activities

Household

Person or group in the same residence

Firm

Organizations that use resources to produce and sell

Product Market

Exchange is from the firm to the household.

YOU buying something from the FIRM

Factor Market

Exchange is from the household to the firm

YOU providing something (labor) the firm needs

Goal

Profit and Revenue

Profit

Financial gain AFTER cost

Revenue

Money gained BEFORE costs are taken out

Rules of a Market Economy

Self-Interest, Incentive, Competition, and Invisible Hands.

Incentive

Expectation, good or bad, that encourages a behavior.

Household = Lower price

Firm = Greater profit

Competition

Struggle among firms for Household money

Invisible Hand

Self-regulating nature or the market

Money ALWAYS on what?

ALWAYS ON THE OUTSIDE

Mixed Economy

The Three Questions decided by a combination of Market Decision Making and Government Order

MOST Morden day economic

Laissez Faire

The government generally should not intervene in the marketplace unless needed