Economics Topics 1 & 2

Basic Economics

Scarcity Means Making Choices
Economics is the study of how people seek to
satisfy their needs and wants by making choices.
Importance
1. Wants are unlimited.
2. Resources are limited.
Scarcity is a situation that exists when there are not
enough resources to meet human wants.

Entrepreneurs Use Factors of Production
Entrepreneurs assemble factors of production, or
the resources used to make all goods/services.
Main Factors
1. Land is all natural resources used to
produce goods/service
2. Labor is all the human time, effort, and
talent used to produce goods/services
3. Capital is any human made resource that
is used to produce other goods/services
4. Entrepreneurs are individuals who use
t the other factors of production to
d. produce a product.
Qualities:
1. Innovative
2. Risktaker

Understanding Decisions
All goods and services are scarce because the
resources used to produce them are scarce.
Importance
1. Make choices because resources limited.
2. Variety of goods/services provided
based on utilization of limited resources
Trade-off is all the alternatives that we give up
whenever we choose one course of action over
another.
Opportunity costs are the next best alternative
given up when a choice is made.
TINSTAAFL – There is No Such Thing as a Free
Lunch.

Economic Systems - Part 1

Three Basic Economic Questions
Resources are scarce everywhere. As a result, every
society must answer three basic economic
questions:
1. What goods and services should be
produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and
services?

Traditional economies are based on traditions,
beliefs, and customs to determine the goods and
products that are created.
Importance
1. Common in rural and farm-based areas
2. Little room for innovation or change
3. 400 million people continue to use
traditional economic systems
Strengths
1. Sets forth certain economic roles for all
members of the community
2. Stable, predictable, and continuous life
Weaknesses
1. Discourages new ideas and new ways of
doing things
2. Stagnation and lack of progress

In a command economy, the government (rather
than the individual producers and consumers)
answers the three basic questions.
Importance
1. Government owns most property
resources.
2. Economic decision making occurs
through a central economic plan.
Strengths
1. Capable of dramatic change in a short
time
Weaknesses
1. Does not meet wants and needs of
consumers
2. Lacks effective incentives to get people
to work
3. Requires a large bureaucracy (uses
resources)
4. Has little flexibility to deal with small
day-to-day changes

Economic Systems - Part 2

Market System
A market economy, is an arrangement where
buyers/sellers determine prices of goods/services.
Features
1. Private ownership of resources
2. Use of markets and prices to coordinate
and direct economic activity
3. Acting in one’s own self-interest

Capitalism
Similar to a market economy, capitalism is based on
private citizens using their resources for private
gain.
Features
1. Protect private property
2. Create environment similar to market
economy
Laissez faire, or “let it be” capitalism means the
government will not interfere with the economy.

Role of Government in Capitalism
U.S., and most other countries, have a system
where the government plays a large role in the
economy.
Importance
1. Sets rules for economic activity
2. Promotes economic growth and stability
3. Provides certain goods/services that
would be underproduced
4. Modifies distribution of income
Government is NOT the dominant economic force
in deciding the three economic questions.

Free Enterprise
Free Enterprise is an economic system
characterized by private or corporate ownership of
capital goods.
Features
1. Investments are determined by private
decision rather than by state control
2. Decisions made in a free market

Benefits and Drawbacks Market System
Strengths
1. Adjust to change gradually
2. Individual freedom for everyone
3. Notable lack of government interference
4. Decentralized decision making
5. Variety of goods/services
6. High customer satisfaction
Weaknesses
1. Rewards only productive resources. Excludes
people too young, too old, or too sick to
work.
2. Must guard against market failures.

Mixed Economy
A mixed economy is an economic system in which
both the state and private sector direct the
economy.
There is no single definition for a mixed economy,
but this system always has two features:
1. Private economic freedom
2. Government regulation of markets
Currently, the United States operates under a
mixed economy.

Production Possibilities

Understanding Production Possibilities
Production Possibilities Curve, or the Production
Possibilities Frontier, illustrates the economic
concept of opportunity cost.
Importance
1. Shows alternative ways to use
resources.
2. Curve is limited to two choices

The shape of a Production Possibilities Curve
reveals important information about opportunity
cost.
Different Types
1. PPC with straight line signals that
opportunity costs remain constant.
2. PPC with concave (bowed out) line
signals that opportunity costs increase.

Identifying Points on a PPC
Any point on the curve represents a point where all resources are being fully utilized (efficient).
Any point inside the curve represents an underutilization, or inefficient, use of resources.
Any point beyond the curve represents is an unattainable production point with current
resources.

Growth on a PPC
If given the right conditions, a PPC can move outward, or “shift to the right”.
Reasons
1. Trade
2. New Source of Resource
3. Technology
4. Education
Decline on a PPC
If given the right conditions, a PPC can move
inward, or “shift to the left.”
Reason
Decrease in a country’s production capacity.

Calculating Opportunity Cost on a PPC
Economists explain increasingly expensive trade- offs through the law of increasing costs.
As production shifts from one item to another, more and more resources are necessary to increase production of the second item.

Understanding Free Market

Why Do Markets Exist?
Consumer Sovereignty is the idea that consumers have the ultimate control over what is produced.
Reason
1. Buy whatever they want
2. Reject what they don’t want
Adam Smith provided insightful analyses to elevate economics to the status of science.
Ideas
1. Nation’s wealth consisted of material
possessions and its people.
2. Specialization and international trade
could increase productivity of nation
Specialization is a situation in which people
concentrate their efforts in the activities they do
best.