Intro to Econ: Unit 1
Basic Economic Concepts
Economics: The Science of scarcity, study of choices
Scarcity: unlimited wants but limited resources
In econ, we will study choices of individuals, firms, and governments
Micro v. Macro
Micro: individuals— small economy
Macro: nations— large economies
Terminology:
Utility: satisfaction
Marginal: additional
Allocate: distribute
The 3 Economic Questions (determine economic systems)
1) What goods and services should be produced?
2) How should these goods and services be produced?
3) Who consumes these goods and services
How to use resources to better society?
4 Factors of Production:
Land: natural resources coming from nature
Labor: effort a person devotes to a task
Capitol: tools needed to create (physical: tools, human: educational degrees)
Entrepreneurship: leaders that combine or come up with the idea
5 Key Economic Assumptions
1) Society’s wants are unlimited; but ALL resources are limited (scarcity)
2) Due to scarcity, choices must be made. Every choice has a cost (trade-off: economic choices)
3) Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest”
4) Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.
5) Real-life situations can be explained and analyzed through simplified models and graphs.
Trade-Offs and Opportunity Costs:
ALL DECISIONS INVOLVE TRADE OFFS!
Trade-offs: alternatives that we give up whenever we choose one course of action over others.
Opportunity Costs: most desirable alternative given up as a result of a decision
Economic Systems and Circular Flow
Economic Systems:
1) Traditional Economy
2) Centrally-Planned (Command) Economy — communism
government…
owns the resources
answers all 3 economic questions
Good: Low unemployment, good job security, equal income, free healthcare
Bad: No incentive to work hard or for better ideas, no competition, corrupt leaders
3) Free Market Economy — capitalism
Little Government involvement in the economy (laissez-faire)
Individuals OWN resources and answer the 3 economic questions
opportunity to make profit gives people incentive to produce quality goods to consumers
Competition and self-interest work together to regulate the economy (keep prices down and quality up)
4) Mixed Economy —Command economy with free market principles
Invisible Hand (Adam Smith): Concept that society’s goals will be met as individuals seek their own interest
Competition and self interest act as an invisible hand that regulates the free market
Economic Systems
Production Possibilities Curve (PPC)/ Graph (PPG): model that shows alternative ways that an economy can use its scarce resources
demonstrates scarcity, trade-offs, opportunity costs, and efficiency
4 Key Assumptions:
only two can be produces
full employment of resources
fixed resources (ceteris Paribus)
fixed technology
Constant Opportunity Cost: resources are easily adaptable for producing either good
result is a straight line (not common)
Law of Increasing Opportunity Cost: as you produce more of any good, the opportunity cost will increase
bowed out, concave
Per Unit Opportunity Cost: how much marginal unit costs
Formula: opportunity cost/units gained
Production Possibilities Curve and Efficiency: Two Types
Productive Efficiency: products being produced in least costly way
any point ON the PPC
Allocative Efficiency: products being produced are most desired by society
optimal point on the PPC depends on desires of society
Shifting the PPC—the 3 shifters:
1) change in resources quantity/quality
2) Change in technology
3) change in trade
****COUNTRIES THAT PRODUCE MORE CAPITOL GOODS WILL HAVE MORE GROWTH IN THE FUTURE
International Trade
Trade: everyone specializes in production of goods and services—> it trades with others
More access to trade —> more choices and higher standard of living
Absolute Advantage: producer that can produce the most output OR requires the least amount of inputs (resources
if the numbers are the same, who uses the least amount of resources
Comparative Advantage: producer with lowest opportunity cost
Output Questions: OOO (Output: Other goes Over) — what they are putting out, what they are making within a fixed time rate
Input Questions: IOU (Input: Other goes Under) —How long it takes to make a specific number of the product
Consumer Choice and Utility Maximization
Law of Diminishing “Additional” “Satisfaction”
losing worth overtime according to experience/repitition
Marginal Benefit = Marginal Cost
Consumption continues until formula is fulfilled
Utility Maximizing Rule: consumers $ should be spent so that the marginal utility per dollar of each good equals each other