1. Part I. How do people deal with scarcity, resources, choice, opportunity cost, price, incentives, supply & demand, production, and consumption? Introduction to Economics

2. A.Scarcity is the inability to satisfy all wants at the same time.  All resources & goods are limited – nothing is infinite.  This requires that choices be made – what shall we make / purchase?  EX: List some items that are most important for life… What if some of these items were scarce?

3. B. Resources are things that are used in the production of goods & services. NaturalCapitalHumanEntrepreneurship Resource from nature needed to produce Includes all goods and machines to produce All people who help produce or distribute The people who run or manage the business Lumber, Water, Iron ore Factories, Machines Delivery cars Factory workers, Delivery men Manager, Designer, Developer, Owner

4. C. Choice is selection of an item or action from a set of possible alternatives. Individuals must choose or make decisions about desired goods & services because goods & services are limited.  EX: You have only $20 & you want to buy a CD & a DVD that are both $18. Which do you choose?

5. D. Opportunity cost is what is given up when a choice is made — i.e., people must consider the value of what is given up when making a choice.  Think of opportunity cost as opportunity lost  EX: You chose to buy an $18 CD over an $18 DVD. The opportunity cost of your choice is the DVD.  EX: You can play video games or shovel your neighbor’s driveway for $20. You choose to stay home & play games. The opportunity cost of your choice is to lose the $20 you could earn.  EX: You watch the Olympics or study for your test in order to make honor roll. You choose to make the honor roll. The opportunity cost of your choice is to watch the Olympics.

6. E. Production is the use of resources to make goods or provide services.  Resources available & consumer preferences determine what is produced.  Consumption is the using of goods & services.  Consumer preferences & price determine what is purchased & consumed. vs.

7. Examples:  EX: When consumers wanted big SUV’s, producers made big SUV’s (2000- 2004).  EX: When gas $ went up, people wanted smaller SUV’s, so producers made smaller SUV’s (2005+)

8. F. Price is the amount of money exchanged for a good or service.  Interaction of supply & demand determines price (greater demand = higher price).  Price determines who acquires goods & services.

9. G. Supply & demand: Interaction of supply (what’s produced) & demand (what’s wanted) determines price.  Demand is the amount of a good or service that consumers are willing & able to buy at a certain price.  Supply is the amount of a good or service that producers are willing & able to sell at a certain price.

10. Practice  If the supply is low & demand is high, producers will charge more  If supply is high & demand low producers will charge less  The goal of the market is for supply & demand to meet in the middle equilibrium

11. H. Incentives are things that entice or motivate consumers to buy. Incentives are used to change economic behavior. EX: Sales, buy-one get-one free, coupons, discounts for certain people (military), $5 footlong  - “I got this for ______% off the regular price!” - “Look, I got two for one!”  - If by June, King’s Dominion hasn’t sold many passes, what are they likely to do?

12. Part II. What are the basic characteristics of the different world economies? What are the basic economic questions all societies must answer?

13. A. The three basic questions of economics are… ♦What will be produced? ♦Who will produce it? ♦For whom will it be produced?

14. B. How do countries set up their economies?  The key factor in determining a country’s economy is how much the government is involved.  Economic systems are set up around a country’s limited productive resources… EX: USA – Crops, coal, technology services; Iran – Oil; China – Manufacturing, labor; Brazil – Wood. Government Involvement Little to none Very involved

15.  Each type of economy answers the three basic questions differently based on its resources and abilities.  No country relies exclusively on its own resources to deal with scarcity…  EX: Countries must trade to get what they need.

16. TRADITIONAL ECONOMIES  Economic decisions are based on custom & historical precedent.  People often perform the same type of work as their parents & grandparents, regardless of ability.  What’s produced is only what was needed to survive; not for profit.  Traditional economy – An old-fashioned form of economy found in historical societies.

17. FREE MARKET ECONOMIES  Free market economy – Not seen because all governments are involved in their country’s economy.  Minimal government involvement – the market determines who sinks or floats.  Private ownership of property / resources – people own all resources; not government controlled.  Profit motive – making money drives all decisions of business / people.

18.  Competition – the struggle between consumers and producers to get the best products at the lowest price.  Consumer sovereignty – the consumers decide what will be sold in the market place… Producer will only supply what the consumers demand.  Individual choice – consumers choose what / from whom they buy based on the best deal.  Associated with true capitalism.

19. COMMAND ECONOMIES  Command economy – Countries with strong government control (former Soviet Union, China).  Central ownership (usually by government) of property / resources.  Centrally-planned economy – what’s produced, who produces it, and what can be bought is controlled.  Lack of consumer choice - government chooses what / from whom the consumer buys.  Often associated with Communism / Socialism / Dictatorships

20. MIXED ECONOMIES  Mixed economy – Blends government control and free market.  Individuals & Businesses - are owners & decision makers for the private sector.  Limited government control – gov’t makes decisions for the public sector.  Government’s role is greater than a free market economy & less than in a command economy.  Most democratic countries today, including the United States, are mixed economies.

21.  *Summary: The type of economy is determined by the country’s government, and the extent of government involvement in economic decision making 1.Communism / Socialism / Dictatorship = Government Control = Command Economy 2.Democracy / Republic / Capitalism = Limited Government Control = Mixed Economy 3.True Democracy / True Capitalism = Total Private Control = Free Market Economy

22. III. What are the essential characteristics of the United States economy? 1. Mixed Market – Markets are generally allowed to operate with limited interference from the government (in the public sector). Prices are determined by supply & demand of producers & consumers. 2. Private Property – Individuals and businesses have the right to own personal property as well as the means of production without undue interference from the government 3. Profit – Profit consists of private earnings after all expenses have been paid, and drives all decisions. 4. Competition – Rivalry between producers/sellers of a good or service results in better quality goods and services at a lower price. 5. Consumer Sovereignty – Consumers determine what goods and services will be produced through purchases. Producers will only supply what the consumers demand.

23.  The United States economy is primarily a market economy; but because there is some government involvement it is characterized as a mixed economy.  Government intervenes in a market economy when the perceived benefits of a government policy outweigh the anticipated costs. Generalizations (Not on notes!)