What is Economics? How Economic Systems Work Economic Resources Capitalism and Free Enterprise

Economics I The Fundamental Problem We do not have enough resources to satisfy our wants and needs- SCARCITY We do not have enough resources to satisfy our wants and needs- SCARCITY Economics is the study of how we make decisions in a world where resources are limited Economics is the study of how we make decisions in a world where resources are limited Scarcity forces us to make decisions and choose alternatives Scarcity forces us to make decisions and choose alternatives

Economics I Three Questions WHAT to Produce- make choices between wants and needs WHAT to Produce- make choices between wants and needs HOW to Produce- oil drilling in Alaska, factories and pollution HOW to Produce- oil drilling in Alaska, factories and pollution FOR WHOM to Produce- who gets what? FOR WHOM to Produce- who gets what?

Economics I Making Economic Decisions Weigh the costs and benefits of an action Weigh the costs and benefits of an action Think of the trade-offs: buy a CD, get music, but lose money- is it worth it? Think of the trade-offs: buy a CD, get music, but lose money- is it worth it? Think of the opportunity costs: cost of the next best use of your time  if you go to college for 4 years, that will cost you 4 years of full time work Think of the opportunity costs: cost of the next best use of your time  if you go to college for 4 years, that will cost you 4 years of full time work When considering the cost of a decision, think of fixed and variable costs When considering the cost of a decision, think of fixed and variable costs Sometimes there are extra costs not considered when the decisions was first made- Marginal Costs  cost of producing one more unit of something Sometimes there are extra costs not considered when the decisions was first made- Marginal Costs  cost of producing one more unit of something Marginal Revenue: Extra revenue made from selling one more unit of output Marginal Revenue: Extra revenue made from selling one more unit of output Marginal Benefit: Extra benefit associated with an action Marginal Benefit: Extra benefit associated with an action

Economics I Cost-Benefit Analysis Compare marginal cost and marginal benefit Compare marginal cost and marginal benefit

Economics I Becoming an Economically Smart Citizen Understand how American economy works  Market Economy Understand how American economy works  Market Economy System of Supply and Demand System of Supply and Demand Based on capitalism- private citizens own means of production Based on capitalism- private citizens own means of production Based on free enterprise- businesses compete with little gov’t interaction Based on free enterprise- businesses compete with little gov’t interaction Understand Incentives- rewards that influence behavior Understand Incentives- rewards that influence behavior Price/Bonuses Price/Bonuses

Economics II Economic Resources American output is measured in goods (what we consume) and services (what we do for others) American output is measured in goods (what we consume) and services (what we do for others) 4 Factors of Production- resources necessary to produce goods and services 1. Natural Resources 2. Labor- nation’s labor force (human resources) 3. Capital- money, tools, machinery to produce other products 4. Entrepreneurs- People who start businesses, invent new products

Economics II Gross Domestic Product People measure economic success by their incomes People measure economic success by their incomes The nation measures economic success by measuring how much (in dollars) all goods and services cost in a year  Gross Domestic Product (GDP) The nation measures economic success by measuring how much (in dollars) all goods and services cost in a year  Gross Domestic Product (GDP) GDP: Number of goods X Price of the good = Value GDP: Number of goods X Price of the good = Value Higher GDP is good  Standard of Living (quality of life) Higher GDP is good  Standard of Living (quality of life)

Economics II Economic Activity and Productivity There is a circular flow in a market (goods/services change hands) There is a circular flow in a market (goods/services change hands) 1. The Consumer- workers earn wages in exchange for labor 2. Business Sector- an person spends their income in the business sector  receive payment in exchange for product 3. The Government Sector- Government acts much like a business 4. The Foreign Sector- US buys and sells products from all nations

Economics II Productivity and Economic Growth Economic growth occurs when total output of goods grows over time Economic growth occurs when total output of goods grows over time There are several factors that help boost economic growth There are several factors that help boost economic growth 1. Productivity  When resources are used efficiently 2. Specialization  When certain markets focus on producing goods/services they can make better than anyone else 3. Division of Labor  Breaking down a job into smaller separate parts 4. Human Capital  investing time and effort into making your employees happy 5. Economic Interdependence  Willingly rely on others for help

Economics III Capitalism and Free Enterprise US Economy based on private ownership of business  Capitalism US Economy based on private ownership of business  Capitalism Free Enterprise  when competition is encouraged and allowed to go on without gov’t interference Free Enterprise  when competition is encouraged and allowed to go on without gov’t interference

Economics III Features of Capitalism 1. Markets- places where the products and money are exchanged *Factor Markets: where money is exchanged for labor *Product Markets: where goods/services are purchased 2. Economic Freedom- ability to make our own economic choices 3. Private Property Rights- ability to own/dispose our own property 4. Competition- struggle between buyers/sellers  keeps prices low 5. The Profit Motive- Ppl. want profit (money left over) and are willing to risk savings for more money 6. Voluntary Exchange- when both the seller and buyer benefit from a transaction

Economics III Spread of Capitalism No one invented capitalism- grew over time No one invented capitalism- grew over time Two concepts Two concepts Idea that people could work for economic gain Idea that people could work for economic gain Idea that government should have a limited role in the economy Idea that government should have a limited role in the economy Adam Smith- The Wealth of Nations Scottish economist Scottish economist Scientifically described the basic principles of economics Scientifically described the basic principles of economics Laissez- Faire Economics- gov’t should not interfere with economy Laissez- Faire Economics- gov’t should not interfere with economy