1.2 - Intro to Economics

Economics

• Economics - a science that examines how goods and services are produced, sold, and used

  • all economic resources are limited; needs and wants are unlimited

• factors of production - the economic resources a nation uses to make goods and supply services for its population

  • land, labour, capital, and entrepreneurship

• land - all of a nation’s natural resources; raw materials found in nature

• labor - the work performed by people in organizations; human resources

• capital - all the tools, equipment, and machinery used to produce goods or provide services

  • capital goods are products businesses use to produce final products for consumers

• entrepreneurship - the willingness and ability to start a new business

  • people who start new businesses are entrepreneurs

• Economic problem: unlimited wants cannot be filled with limited resources

• scarcity develops when demand is higher than the available resources

  • every consumer decision has a cost. scarcity forces choices to be made

• trade-off - something is given up in order to gain something else

• opportunity cost - the value of the next best option that was not selected

  • value is the relative worth of something

systematic decision-making - process of choosing an option after evaluating the available information and weighing the costs and benefits of the alternatives

• define the problem

• research alternatives

• choose the best alternative

• implement the decision

• evaluate decision

Economic Systems

• economic system - an organized way in which a nation chooses to use its resources to create goods and services

• scarcity leads to three economic questions:

  • what should we produce?

  • how should we produce it?

  • for whom should we produce it?

• Traditional economy - economic decisions are based on a society’s values, culture, and customs

  • large rural populations that rely on farming and hunting activities to meet needs

  • little to no manufacturing

  • people barter for goods or services

• Command economy - government makes all economic decisions for its citizens

  • centrally-planned economy

  • found in communist or socialist societies

  • The government owns and controls all factors of production, decides the quantity of production, and sets prices

• market economy - individuals are free to make their own economic decisions

  • free enterprise or private enterprise

  • capitalism - an economic system where the economic resources are privately owned by individuals rather than the government

    
    

• characteristics of a free enterprise system:

  • private property, profit, economic freedom, voluntary exchange, competition

    
    

• mixed economy - both government and individuals make decisions about economic resources

  • The level of government involvement in mixed economies can vary

market forces

• market forces - economic factors that affect price, demand, and availability of a good or service

  • include supply and demand, the profit motive, and competition

• law of supply and demand - price of a product is determined by the relationship of the supply or a product and the demand for the product

• market price is determined at the point where supply equals demand for a product; this point is called equilibrium

• supply curve - producers supply greater quantity at higher prices

• demand curve - consumers buy fewer goods at higher prices

• when demand is greater than supply, a shortage develops

• when demand is less than supply, a surplus develops

• profit motive - one reason people choose to start and expand businesses.

  • profit is the difference between income earned and expenses incurred by a business driving force of creating a business

• competition - the action taken by two or more businesses attempting to attract the same customers

• consumers are free to choose the goods and services they buy