Economics Unit 1 Chapter 1
ECONOMICS is: The study of how people seek to satisfy their needs and wants by making choices.
The Economic Problem: Scarcity: When we have limited amounts of resources to meet our unlimited amount of wants and needs It will ALWAYS exist.
The Economic Problem: Scarcity: every society must deal with this because resources are limited and vary from place to place. It will ALWAYS exist.
This will always cause us to have to make choices between our wants and needs. How do you define wants/needs?
Because of scarcity, if we want to find ways to meet our wants and needs, then we are going to have to make choices on how we use our limited resources. We call what we use to make these final goods and services inputs, or factors of production.
1. Land Natural resources that are used to make goods and services • Soil • Trees • Gold • Diamonds • Water
2. Labor The effort people devote to a task for which they are paid.
3. Capital Any human-maderesource that is used to create other goods and services. Physical Capital: human-made objects used to create goods and services. Human Capital: skills and knowledge gained by a worker through education and experience.
4. Entrepreneur An ambitious leader who combines the F.O.P.’s to create and market new goods and services.
So what is used to create goods and services are called inputs, or Factors of Production The goods and services are what is created to meet our needs and wants. They are also called outputs.
We make choices on how to use our Factors of Production to create goods and services to meet our needs and wants… …but when we make that choice, we make the choice to NOT do other things with those same resources.
Trade Offs – are all of the alternatives we give up when we choose one course of action over another. Opportunity Cost: The most desirable alternative GIVEN UP as the result of a decision. It is always a single thing.
To help us make the best decision, we think at the margin. That is we look at what we currently do with our resources and make choices on whether to do more or less.
Thinking at the Margin is what helps a person, business or society determine their trade offs and opportunity cost if they make this decision. You want your marginal benefits to exceed the marginal costs!
A tool to help us see alternative ways of using our resources is called a Production Possibilities Curve (PPC) or graph (PPG)
PPC or PPG The choice is using our resources to make shoes in a factory, or use the land to grow watermelon, or a combination of both… Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC or PPG Going from Point A to Point B involves a choice. So we think at the margin and see that to increase Watermelons from 8 million pounds to 20 million pounds… Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC or PPG …we will give up 9 million pairs of shoes. This is our opportunity cost. If this decision would benefit our company more than it costs we will make this decision. (Marginal Analysis) Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC or PPG Using 100% of your land, labor, and capital is efficient and is represented by the Production Possibilities Frontier line. Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC or PPG Point D is not possible because even if you used 100% of your inputs, you can’t go beyond the frontier. To increase the frontier you need to increase your inputs or technology. Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC or PPG Point C is any point where you are not efficiently using your land, labor, or capital. This is called underutilization. Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC or PPG If your resources change, a new PPC must be created. More resources and technology shift the curve to the right. Less resources and worse technology shift it to the left. Impossible with current resources Shoes Production Possibilities Frontier 14 S, 8 W Pg 15-17 in Textbook 5 S, 20 W Underutilization Watermelon
PPC’s always show a snapshot of the choices you can make with CURRENT resources. If anything changes, your choices then change and you need a new PPC! Individuals might use this to choose between sleeping and studying Businesses like Apple might use this to choose between making Iphones and Ipads. Governments might use this to decide on spending tax dollars on education, or Social Security
If a individual, business, or society decide to increase their production of how they use resources, the cost of producing the new thing will always increase. This is called the Law of Increasing Costs.
Because of Scarcity we must make choices on what to produce so that our needs and wants are met. We want to be efficient and not waste our resources. In order to be efficient, each society must decide how it will answer 3 economic questions. They are:
1. What Goods and services should we produce? 2. Who will consume these goods and services? 3. How shall we produce these goods and services?
To answer the 3 questions, each society must have an economic system. No matter which system we are talking about, they all have basic characteristics that are addressed in different ways. These characteristics include: Property Rights Incentives Economic Freedom Competition The Role of Government
Property Rights: This refers to the idea of ownership. If you couldn’t own your property, your capital, your land, your ideas, etc., then how would this affect the choices of individuals, businesses, and governments?
Incentives: How will you motivate individuals, businesses, and governments to participate in the production of goods and services and the consumption of them?
Economic Freedom: How much government intervention will occur in your society and life? How free will individuals be to decide what to produce and consume? What about businesses? Who makes these decisions?
Competition: How much will be allowed? How will it regulate the marketplace? How low will prices go and if too low will it encourage a waste of resources?
The Role of Government: How much of a role will government take? Will they centrally plan the entire market regarding the production and consumption of goods and services? Will they let the market regulate themselves? Will they jump in only to create a level playing field for all who participate? Will they decide what is fair and equitable for all?
The fact is, every society seeks to address these characteristics in a way that they feel is best in order to answer the 3 economic questions. In this way, they seek to meet their needs and wants, and find a way to have advantages over other societies so that they can trade for their needs and wants if they lack the resources. They sometimes also seek an advantage to take by force other society’s resources.
The main economic systems that have been developed to answer the 3 economic questions are: 1. Free Enterprise System 2. Socialistic System Communism In reality, every society has a mixed economic system that includes a mixture of these 2 ends of the spectrum. But they usually lean towards one system over the other.
Free Enterprise System Synonymous Terms (A.K.A. Free Market or Capitalism) 1. Property Rights: Protected property rights to encourage more ownership and risk 2. Incentives: Profit Motive-The desire to get all your needs and wants met. 3. Economic Freedom: Total Freedom to produce and consume goods and services 4. Competition: Unlimited so that there is lower prices, and more innovation Role of Government: Laizze Faire role-in other words, the government does not get involved at all. No pure free market exists-always some govt. involvement
A market is an arrangement that allows buyers and sellers to exchange things. Individuals and businesses use markets to exchange money and products. Self-interest and competition work together to regulate the market place.
Free Markets: Advantages • Economic Efficiency – producers make only what consumers want, when they want it, and generally at prices that they are willing to pay. • Economic Freedom – workers can work where they want, firms produce what they want, and individuals consume what they want. • Economic Growth – competition encourages innovation, free markets encourage growth. • Additional Goals – consumers basically decide what gets produced.
Free Markets: Disadvantages Economic equity - the rich get richer and the poor get poorer. Economic security - there are no guarantees such as unemployment , Medicare, or social security.
Socialistic System Many times embraced by Communist Governments. 1. Property Rights: Is primarily owned publically by the state 2. Incentives: Productivity so all can share in the profit collectively 3. Economic Freedom: Little freedom due to heavy government intervention. 4. Competition: Non-Existent as most goods are publically owned Role of Government: Centrally plan the production, distribution, and consumption of goods and services
Socialism: Advantages • Government provides raw materials. • Wealth is distributed evenly. • Central planning can jump start • industries. • Guarantees jobs and income to all • workers.
Socialism: Disadvantages Competition ands self-interest are absent from the system. Consumers do not make decisions of what to make or how much to produce. No reward for innovation. Focus on quantity and not quality.
United States Economy • Leans more Free enterprise with low government involvement. • Foreign investment is encouraged. • US will protect some domestic industries and fight against trade restrictions. • Banking industry under relatively few restrictions
U.S. Circular Flow Model A Keynesian Approach
In America, we participate in the market to produce and consume goods and services to meet our needs and wants A tool we use to show this participation and the different markets of exchanges is called a Circular Flow Model or Chart.
Consumers/Households own the factors of production. • They sell the F.O.P.’s to the firms in the Factor/Resource Market in exchange for money. • They also sell F.O.P.’s to the Government and are paid by the government for them in the form of expenditures. • Consumers pay the government revenue in the form of taxes whenever they purchase goods/services in the product market.
Firms buy the factors of production from households/individuals for money in the factor/resource market in order for the entrepreneur to combine the inputs to create a good or service. • They sell the goods and services they make to the households/individuals in the Product Market in exchange for money. • They also sell Goods/Services to the Government and are paid by the government for them in the form of expenditures. • Firms pay the government revenue in the form of taxes whenever they purchase F.O.P.’s in the factor/resource market.