1. E CONOMICS C HAPTER 1 What is Economics?

2. W HAT IS E CONOMICS ? Economics-the study of how people seek to satisfy their needs and wants by making choices. Need- Want- Goods services

3. S CARCITY AND S HORTAGES ? Scarcity-

4. F ACTORS OF P RODUCTION Land- Labor- Capital - Physical human

5. O PPORTUNITY C OST AND T RADE - OFFS Tradeoffs Opportunity cost

6. T HE D ECISION -M AKING G RID BenefitsEnjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction DecisionSleep lateWake up early to study for test Opportunity costExtra study timeExtra sleep time Benefits forgoneBetter grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day Sleep lateWake up early to study Alternatives Karen’s Decision-making Grid

7. T HINKING AT THE M ARGIN Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep

8. Watermelons (millions of tons) Shoes (millions of pairs) 25 20 15 10 5 0 252015105 Production Possibilities Graph Watermelons (millions of tons) 0 a (0,15) 15 814 b (8,14) 14 18 20 21 12 9 5 0 A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) P RODUCTION P OSSIBILITIES A production possibilities graph shows alternative ways that an economy can use its resources.

9. Shoes (millions of pairs) 25 20 15 10 5 0 252015105 Watermelons (millions of tons) Production Possibilities Graph g (5,8) A point of underutilization c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S E FFICIENCY Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.

10. Shoes (millions of pairs) 25 20 15 10 5 0 252015105 Watermelons (millions of tons) Production Possibilities Graph T Future production Possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S G ROWTH Growth If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve “shifts to the right.”

11. Watermelons (millions of tons) Shoes (millions of pairs) 25 20 15 10 5 0 252015105 Production Possibilities Graph Watermelons (millions of tons) 14 18 20 21 12 9 5 0 015 814 c (14,12) d (18,9) C OST Cost: Switching production from one product to another involves a loss of production for one item.

12. C HAPTER 2 Answering the three economic questions

13. T HE T HREE E CONOMIC Q UESTIONS Every society must answer three questions: 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services?

14. E CONOMIC G OALS Economic Efficiency – Economic Freedom – Economic security – Economic Equity – Econ Growth –

15. An economic system is the method used by a society to produce and distribute goods and services. Traditional economies Centrally planned economy Market economy Mixed economies

16. W HY D O M ARKETS E XIST ? A marketSpecialization

17. monetary flow physical flow monetary flow physical flow Circular Flow Diagram of a Market Economy Households Firms Product market Factor market Households pay firms for goods and services. Firms supply households with goods and services. Households supply firms with land, labor, and capital. Firms pay households for land, labor, and capital. T HE F REE M ARKET E CONOMY In a free market economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services. Invisible hand Self interest competition

18. T HE I NVISIBLE H AND OF THE F REE M ARKET Comes from the great philosopher Adam Smith (18 th century) Made up of two components Self Interest Competition

19. A DVANTAGES OF THE F REE M ARKET Efficiency Growth FreedomVariety

20. C ENTRALLY P LANNED E CONOMIES Socialism = Communism=

21. T HE F ORMER S OVIET U NION Soviet Agriculture Large farms called collectives Soviet Industry Focus on military goods and heavy industry Soviet Consumers Few available products but very cheap prices

22. P ROBLEMS OF A C ENTRALLY P LANNED E CONOMY Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

23. monetary flow physical flow monetary flow physical flow Circular Flow Diagram of a Mixed Economy Households Firms Product market Factor market Government expenditures government- owned factors taxes government purchases G OVERNMENT ’ S R OLE IN A M IXED E CONOMY In a mixed economy, The government purchases land, labor, and capital from households in the factor market, and Purchases goods and services in the product market.

24. Continuum of Mixed Economies Centrally plannedFree market Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Iran North Korea Cuba China RussiaGreecePeruUnited States South AfricaFranceUnited Kingdom BotswanaCanadaSingapore Hong Kong C OMPARING M IXED E CONOMIES An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations.

25. C HAPTER 2 O PEN N OTE Q UIZ 1. List and describe the goals achieved/advantages of free markets. 2. Describe centrally planned economies. 3. What are the three questions that each society must answer? 4. How does socialism differ from communism? 5. What type of economy does the U.S. have? Why? 6. What two factors help to keep free markets regulated? 7. What is the invisible hand? 8. What is laissez faire? 9. Why are most countries mixed economies? 10. What is the primary role of government in the United States economy?

26. C HAPTER 2 R EVIEW 3 economic questions Centrally planned economies Free market economies Traditional economies Advantages of mixed economies Advantages of free market economies What happened to the major centrally planned economies (China, Soviet Union Continuum of Mixed economies (especially Canada, U.S. China) Economic Goals Efficiency Growth Freedom Additional goals (varies) Invisible hand Self interest Competition Why are most countries mixed Adam Smith

27. C HAPTER 3 American Free Enterprise

28. F REE E NTERPRISE Free Enterprise -

29. B ASIC P RINCIPLES OF F REE E NTERPRISE Profit motive- Open opportunity-

30. E CONOMIC R IGHTS Legal Equality- Private property- Free contracts- Voluntary exchange- Competition-

31. W HAT SHOULD GOVERNMENT DO ? Protect Consumers Public Disclosure laws- Protecting Health and Safety-

32. P ROVIDING A S AFETY N ET The Poverty Problem- Poverty threshold- level of income below what is needed to support families or households. In 2000 a single parent under 65 was $11,869 and a four person family was $17,463. Government Role- Yet as a society that prefers limited government activity in the economy, poverty poses tough questions: A. What can government do to combat poverty? B. What should government do?