Lesson 7 Review

What is Economics?

Lesson 7A – Economic Systems

Adam Smith (Wealth of Nations):

• Known as the "Father of Capitalism."
  
  

• Argued for a free market economy where competition and self-interest regulate the economy.
  
  

Law of Supply and Demand:

• Prices are determined by the relationship between supply and demand.
  
  

• High demand and low supply = higher prices.
  
  

• Low demand and high supply = lower prices.
  
  

Laissez-Faire:

• A policy of minimal government interference in the economy.
  
  

Invisible Hand:

• The self-regulating nature of the marketplace; individuals pursuing their own interest unintentionally benefit society.
  
  

Karl Marx (Communist Manifesto):

• Criticized capitalism and argued for a classless society.
  
  

• Believed in a revolution of the working class.
  
  

Bourgeoisie:

• The capitalist class who own most of society's wealth and means of production.
  
  

Proletariat:

• The working class who sell their labor to the bourgeoisie.
  
  

Three Major Factors of Production:

1. Land – Natural resources.
   
   

2. Labor – Human effort/work.
   
   

3. Capital – Tools, machinery, and buildings used in production.
   
   

The Three Economic Questions:

1. What to produce?
   
   

2. How to produce it?
   
   

3. For whom to produce?
   
   

Modern Economic Systems:

• Market Economy: Decisions made by individuals and businesses.
  
  

• Planned/Command Economy: Government makes all economic decisions.
  
  

• Mixed Economy: Combination of market and command features.
  
  

In different economic systems, it all comes down to who…
controls the factors of production.

Spectrum of Government Involvement:
<---No Gov’t (Free Market) | Mixed | Full Gov’t Control (Command)--->

According to Karl Marx, the theory of communism can be summed up in what single sentence?
"Abolition of private property."

In practice, no country has ever been truly
communist.
There are a lot of countries that are
mixed economies with some socialist policies.

Lesson 7B – What is Economics?

Definition of Economics:

• The study of how people choose to use limited resources to satisfy unlimited wants.
  
  

Definition of Scarcity:

• The condition that results from limited resources and unlimited wants.
  
  

Basic Economic Problem:

• Scarcity forces people to make choices due to limited resources.
  
  

Allocation:

• The process of distributing resources among competing uses.
  
  

Lesson 7C – Economic Concepts

Circular Flow Model:

• A visual model showing how money, resources, and goods/services move in an economy.
  
  

Households:

• Provide labor and consume goods/services.
  
  

Firms/Businesses:

• Use resources to produce goods/services for profit.
  
  

Resource/Factor Market:

• Where firms buy resources (land, labor, capital) from households.
  
  

Product Market:

• Where households buy goods and services from businesses.
  
  

TANSTAAFL:

• "There Ain’t No Such Thing As A Free Lunch" – Every choice has a cost.
  
  

Trade-Off:

• Giving up one thing to get something else.
  
  

Opportunity Cost:

• The most valuable alternative given up when a choice is made.