Economic Systems

Economic Systems

• Land: Refers to all natural resources used to produce goods and services. This includes crops grown on land, minerals mined from land, and rent paid to an owner of land for its use. 

• Labor is the effort that an individual puts into making a good or service. An individual is paid a wage for this effort. Labor includes factory workers, medical personnel, and teachers. They all provide their labor for a wage.

• Capital is Anything that is used to produce other goods and services. If you make cars you need machines to make the parts that is used. Also the truck that drives the cars to the dealership who sells them. Lastly the building that the cars are made in. All of these are known as capital. 

• Specialization is a method of production in which an individual focuses on the production of a limited scope of goods to gain a greater degree of efficiency. The idea of specialization is to focus on your strengths.

• Adam Smith (The Wealth of Nations) He called the forces that guide people to do what is best for themselves the “invisible hand” and believed that the market for goods and services was regulated by the law of supply and demand, and would naturally regulate itself.

• Adam Smith Pt. 2 Competition in the market is good.

  • Creates more choices for consumers, and prevents unreasonable prices

  • Encourages specialization and therefore improves efficiency

  • Drives innovation as producers try to gain and maintain customers

• Free markets are the best way to allocate economic resources because of the invisible hand and the way they encourage competition

  • Smith recommended that the central government adopt a laissez-faire (French for “hands-off”) policy toward the economy.

  • Allowing consumers and producer to make the economic choices creates wealth and prosperity

• Karl Marx (Communist Manifesto) In the current system, the rich take advantage of the poor - the factory and resource owners (capitalists/bourgeoisie) can manipulate and abuse the working population (proletariat) with ease thanks to their economic advantages. 

• The working man should be able to enjoy the fruits of his labor, but in the capitalist system they are stolen from him by the wealthy resource owners. 

• Economic inequality in the capitalist system creates a society where the poor have no value and therefore have miserable lives. This is bad for society as a whole.

• Karl Marx Pt. 2 Revolution was necessary to reform this system. 

• After the revolution got rid of the existing government and economic powers, a dictatorship of the workers (proletariat) should set up a society and economy that benefited all workers, and shared resources in a fair and equal way. 

• After this system was established and stable, no government would be necessary because everybody would look out for their fellow citizens. 

What is economics?

• We can’t help everyone because of scarcity, scarcity means that you have very few resources, which can also make you make decisions.

• Economic studies how people make decisions about allocating (giving out) scarce resources.

• That scarce resource is often money, but it can be other things like time, natural resources, labor, dialysis machines, stadium seating, ventilators, etc.

• Decisions about allocating scarce resources always involves trade-offs - getting something and giving up something.

• The thing we give up is the opportunity cost. Nothing is free!

• Getting the most benefit with the least cost is the goal of economists

TANSTAAFL- There ain’t no such thing as a free lunch.

• A Trade-off involved a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to do 'option B,' because they want to do 'option A' instead.

• In economics, the term trade-off is often expressed as an opportunity cost..

• Opportunity cost is the value of any alternative that you must give up when you make a choice in the short the opportunity cost is the value of the opportunity lost Ex: If you choose to spend your money on clothes, jewelry and going out rather than saving it for a big purchase (car), the opportunity cost is the saving you must give up in order to spend now. 

• Benefits forgone which means that you refer to opportunities that were missed or not taken advantage of in the past EX: Teresa not saving and planning for the future.

• Thinking at the margin Or marginal thinking means considering how much you value an addition of something. You ignore the sunk costs of what's already going to happen, and weigh up the costs and benefits of adding in something extra

•  Incentives In the most general terms, an incentive is anything that motivates a person to do something. When we're talking about economics, the definition becomes a bit narrower: 

• Economic incentives are financial motivations for people to take certain actions.