Econ Unit: 1

What is Economics?

How people choose to use scarce resources to satisfy their needs and wants (i.e. to achieve goals)

Needs Vs. Wants

Needs

Something like air, clothing, food & shelter that is necessary for survival.

Needs Vs. Wants

Wants

An item we desire but is NOT essential to survival.

Goods & Services

Goods

Physical objects such as clothes or shoes.

Goods & Services

Services

Actions that one person performs for another.

Scarcity (4)

-All resources are scarce. Scarcity = limited resources to meet unlimited wants.

• Our resources are insufficient to achieve all our goals and all our wants.

• We cannot have everything we want.

• Using economic reasoning, i.e. making choices, we can get more from our resources. 

Scarcity vs. Shortage

Shortage (2)

• A situation in which a good or service is unavailable temporarily. 

• Sometimes a producer cannot or will not offer a good or service.

Scarcity vs. Shortage

Goods

Goods are scarce because resources are scarce.

Factors of Production definition

The resources used to make goods and services (land, labor, capital, entrepreneur)

1st Factor of Production

Land - all natural resources used to make goods and services (land, coal, water, wood, etc.)

2nd Factor of Production

Labor - The effort people devote to a task for which they are paid.

3rd Factor of Production

Capital - Any human made resource that is used to produce other goods and services.

Physical Capital (2)

• Human made objects that create goods or services (buildings, tools, factories.) 

• These things make us more productive.

Human Capital

The knowledge or skills a worker gains through education and experience.

4th Factor of Production (2)

• Entrepreneurship-combines all resources to produce a new good or service.

• Entrepreneurs are ambitious leaders who combine land and capital to create and market new goods and services.

1st Basic Economic Question (4)

-What to produce.

• Societies must choose due to limited resources.

• Ex: G*ns or Butter.

• If a country decides to produce more military goods (g*ns) then they will have fewer resources to devote to consumer goods, ex: health care, education (butter).

2nd Basic Economic Question

How to produce machines or people to make the goods.

Machines vs. People in Labor

Machines (3)

• Works 24/7

• Consistent, precision, speed

• Saves money over long-run

Machines vs. People in Labor

People in Labor (3)

• Craftsmanship (charge higher final price)

• Adaptability

• Creative & problem solving

3rd Basic Economic Question (2)

-For Whom to produce

• Who is receiving the products produced

Trade Offs

An alternative we sacrifice when we make a decision

Individual Trade-offs example

Work more, play less

Business Trade-offs example

Produce more coconuts rather than papaya.

Opportunity Costs & example (3)

-The most desirable alternative given up as the result of a choice.

• What you give up when you make a choice

• Ex: If you choose to attend college this year, your opp. cost is the salary you would’ve received from the best available full time job.

Cost Benefit Analysis & ex (3)

-The potential benefit that is given up as you seek an alternative course of action.

• What is the cost, what is the benefit of the decision

• Ex: Cost of college vs benefit of future earnings with degree.

Gross Domestic Product (GDP) (3)

-The dollar value of all final goods & services, and structures produced within a country’s borders in a 12 month period (1 year).

• Most comprehensive measure of economic performance in a country

• Includes things like consumption, investment, gov spending, exports/imports

Macro Vs. Micro

Macro (2)

• Gross Domestic Product (GDP):Total of all value added/created in an economy (value = produced – production cost)

• Aggregated Decisions:Total demand for goods and services in a market.

Macro Vs. Micro

Micro

Supply and Demand of Labor: How many people a job can hire and still make a profit (not going to hire someone who makes $10 an hour if they only bring extra $5 to the company)

Interdependence (2)

-Events in 1 part of the world can have an impact in other parts of the world

• Ex: the U.S. relies on other nations AND other nations rely on the U.S. to provide the goods & services we consume.

Global Supply Food Chain (2)

-A worldwide network of people, businesses, and activities that produce and deliver goods and services

• Products often move through multiple countries before reaching consumers.

Example of Global Supply Chain (4)

Example: Smartphone supply chain

• Designed in the U.S.

• Parts made in Taiwan, South Korea, China

• Assembled in Vietnam

• Sold worldwide

Incentive & example (2)

- Something that motivates a person to do something. These are the things that affect the decisions that we make.

• Ex: Unmanageable Teens

Types of Incentives (2)

• Monetary

• Non-Monetary: Moral, Coercive, Natural, Social

4 Factors of Production

1. Land

2. Labor

3. Capital

4. Entrepreneurship

Monetary Type of Incentive & example (2)

-Motivation to do something on the basis of financial gain or loss.

• Getting paid or winning a car.

NON-monetary type of Incentive: Moral (2)

-Motivates people based on their societal values and beliefs of what is right and wrong.

•  ex: Stealing, murder, adultery, etc.

NON-monetary type of Incentive: Coercive (2)

Motivates someone based on a consequence or punishment

• Use of violence or force (spanking), prison

NON-monetary type of Incentive: Natural (2)

-Motivation to do something on the basis of individual curiosity

• ex: What will happen if I…?

NON-monetary type of Incentive: Social (2)

-Motivation to do something to gain social praise or fear of criticisms

• ex: Compliments or ridicule.

Positive vs. Negative Incentives

Positive Incentives (2)

-Motivates individuals through a gain

• Example: a bonus on a pay check

Positive vs. Negative Incentives

Negative Incentives (2)

-Motivates individuals by forcing them to avoid a loss or cost

• Example: no recess if students misbehave!

3 Contributing Factors to why People Cheat + examples

1. To get what you want with less effort

2. To avoid looking bad

3. Absence of a culture of ethics/decorum

• ex: Pro Golf - High expectations of honesty and posture

• ex: Pro Soccer - A foul turns into an academy award performance! Exaggerating fouls is part of the game!

Father of Modern Economics and 5 things he’s famous for

Adam Smith

1. Wrote Wealth of Nations, one of the most important books on economics

2. Believed people should be free to produce and sell products at a profit (free market)

3. Believed that people should take care of themselves

• They would work harder, produce more, and grow richer

4. Felt that competition was good and acted like an invisible hand to push us to do what is best for ourselves

5. Felt that an economy works best in a free market.

The Three Basic Questions All Economic Systems Must Answer

1. What Should Be Produced?

-We need to decide what and how much to produce

2. How Should It Be Produced?

-Knowing what we will produce, we have do decide how it will be done

3. Who Should Get Goods and Services?

-Should only those people with enough money to buy the goods and services get them, or should the government decide who receives them?

What is an Economic System? (4)

• It is the way societies try to provide for the wants and needs of their people

• The choices we make as shoppers, workers, business owners and government leaders create the economy.

• The economic system answers the three basic questions of what, how and who

• There is no right answers and no wrong answers

Traditional Economy (6)

-Does things as they were done in the past

• The three basic economic questions are answered as they were in the past

• An advantage of this is that people know what is expected from them

• What you produce is based on what was produced in the past

• How you produce is the way your ancestors did

• Who gets the goods and services are based on who typically always received them in the past

Traditional Economies are usually found in… (3)

• Found in rural areas of the world

• Centered on family or tribal groups

• Change occurs very slowly

Socialism (3)

• Belief that governments rather than individuals should own a country’s major industries

• The government owns communication systems, transportation systems, oil and utilities such as gas and water

• It provides free healthcare, education, welfare and cultural programs

Democracy (2)

• Today many countries are democracies

• Citizens elect representatives to make and carry out laws

Democratic Socialism (2)

• Where the people have a say in the government but the government owns all major industries

• Many European countries have this form on government (Denmark, Finland, Sweden, Norway)

Command Economic System (2)

• Government leaders give the answers to the three basic economic questions

• They gives commands on what, how and for whom to make goods and services.

The people in the Command Economy are ___ free

NOT free in a command economy

Planned economy in Command Economic System (2)

• Government leaders are a group of planners (AKA planned economy)

• The planners may decide to stress heavy industry large-scale production of items like steel.

Example of Command Economy (4)

• Former Soviet Union:

• Most people worked in agriculture

• Soviet Leaders changed focus to be industrial

• Result was a shortage of consumer goods like soap

Communism (4)

-A form of socialism based on the writings of Karl Marx

• Government owns all property

• Government owns all factories and even the land

• People work to the best of their abilities, only use what they need

Communists believe that communism…

Takes care of everyone’s needs and wants.

Communist countries eventually develop into _____ like the former Soviet Union (2)

• Dictatorships

• (The Soviet Union collapsed in 1991 in part because the economy fell apart.)

Capitalism (6)

-People and private businesses own and control production.

• People and businesses make decisions about how resources are used.

• AKA market economy

• People are free to buy whatever goods and services they want

• Producers use their resources to make what consumers want the most

• Capitalism provides people with an incentive to work, (making money)

Mixed Economic System (3)

• A blend of economic systems

• Individuals and Govt. share in the decision-making process

• Many capitalist countries have mixed economies

Only traditional economic systems exists. All other economies are ________

Mixed economies

What Gov does in Mixed Economy (2)

-Sets goals, controls much of the capital and owns much of the land

• Americans believe in a free market: an economic system based on supply and demand with little or no government control.

A trade-off occurs when

One choice replaces another

GDP is calculated over

Calculated over ONE year

Microeconomics focuses on

Focuses on INDIVIDUAL MARKETS

Economics mainly focuses on

How people deal with scarcity

GDP includes _______ goods but does NOT include ______ goods or _________ labor.

• Includes FINAL goods

• INTERMEDIATE goods

• UNPAID/HOUSE labor