What is Economics? Chapter Two

Key Assumptions in Economics People are rationally self-interested ◦ They seek to maximize their utility (happy points) People generally make decisions at the margin ◦ They weigh the marginal benefit against the marginal cost of a decision Ceteris Paribus ◦ Economists hold factors constant, except for what’s being considered

Basic Economic Vocabulary Economics ◦ The study of choices people make to satisfy their needs and wants Microeconomics ◦ The study of how individuals and firms deal with scarcity Macroeconomics ◦ The study of how society as a whole deals with scarcity

Basic Economic Vocabulary Needs ◦ Necessities for survival Wants ◦ Goods and services consumed beyond what is necessary for survival

Basic Economic Vocabulary Goods ◦ Physical objects that can be purchased Services ◦ Actions or activities performed for a fee Consumers ◦ People who purchase goods and services Producers ◦ People who supply goods and services

What is Economics? Goods and Services are tangible and intangible things that satisfy people’s wants and desires. ◦ Goods: Cars, Computers, Ipods, Fruit, Cell phones ◦ Services: Doctor, Teacher, Accountant, Librarian SO… What are the wants and desires of all individuals?

What is Economics? WE WANT EVERYTHING!

What is Economics? OUR WANTS ARE UNLIMITED!!

What is Economics?  We want; food, water, good grades, a haircut, money, a car, a home, pictures, furniture, groceries, relationships, happiness, we want, we want, we want… the list is endless  What is the definition of Economics?  “Economics is the study o f how individuals and society, experiencing virtually limitless wants, chooses to allocate its scarce resources to satisfy those wants.”

What is Economics? So what dilemma does this create? ◦ We have unlimited wants, and scarce resources. What causes this dilemma? ◦ Scarcity- the idea that our unlimited wants out weigh the resources available which makes all levels of society make decisions.

What is Economics? What is scarce? ◦ Everything is scarce because our wants ALWAYS exceed the limited resources available. Simply put… Economics is: ◦ Economics=Scarcity  And the definition of Scarcity is ◦ Scarcity = wants > availability of resources

What is Economics? When decisions are made there is always a cost involved. ◦ Opportunity Cost= the value of what you must give up when you make a particular choice. ◦ Example: Going to college, what are you giving up?

What is Economics? Four Categories of Scarce resources: 1.Land  Raw Materials, Natural Resources, Air, Water 2.Labor (Human Capital)  Human knowledge, Skills, Workers willing and able to perform a job 3.Physical Capital  Machines, Factories, Equipment 4.Entrepreneurship  Someone willing to take a risk and start a business

Resources a.k.a. The Factors of Production Economists classify resources into 4 categories 1.Land  Natural resources  The payment for Land is RENT 2.Labor  Human resources  The payment for Labor is WAGES 3.Capital (a product of Investment)  Tools, machines, factories  The payment for Capital is INTEREST 4.Entrepreneurship  The special ability of risk-takers to combine land, labor and capital in new ways in order to make profit  The payment for Entrepreneurship is PROFIT

The Fundamental Problem of Economics: Scarcity People have unlimited wants but the resources to satisfy those wants are scarce. Therefore, we must make choices about how to use our scarce resources. We face trade-offs when it comes to using available resources. ◦ Ex. Assume flour is a scarce resource: 3 cups of flour can be used to make a loaf of bread or a cake, but the 3 cups cannot be used to make both.

The Fundamental Problem of Economics: Scarcity OR

Opportunity Cost Once a resource or factor of production has been put to productive use an opportunity cost is incurred. Opportunity cost is the next best alternative use for a resource. ◦ Ex. If the 3 cups of flour are used to bake bread, then the opportunity cost is the cake that could also have been baked with the 3 cups of flour. No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.

TINSTAAFL There is no such thing as a free lunch.

TINSTAAFL Everything has a cost.

TINSTAAFL Illustrated: The PPC The PPC = The Production Possibilities Curve The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.

TINSTAAFL Illustrated: The PPC

What is Economics? Unit TWO

What is Economics? What are we studying specifically? ◦ How societies make decisions from limited resources to meet their societal goals and answer the 3 key economic questions: 1.What to produce? 2.How to produce it? 3.Who is going to consume the good/How is it allocated? Societal Goals- Efficiency, Growth, Security, Equality, Freedom

What is Economics? 4 Economic Systems: 1.Traditional 2.Centrally Planned 3.Free Market 4.Mixed/Modern

Why do we have Economic Systems? Survival for any society depends on its ability to provide food, clothing, and shelter for its people. The Economic System is the organized way a society provides for the wants and needs of its people.

Three Economic Systems Traditional Economy Command Economy Market Economy

Traditional Economy Economic activity is based on ritual, habit and custom

Strengths of Traditional Economies Everyone knows their role Little uncertainty over what to produce or how to produce The question of For Whom to produce is answered by custom Life is generally stable, predictable, and continuous

Weaknesses of Traditional Economies Tends to discourage new ideas Lack of progress leads to lower standard of living

Command Economy Central authority makes most economic decisions Economic decisions are made at the top and the people are expected to go along with choices their leaders make

Strengths of Command Economies Change direction drastically in a relatively short time (The USSR went from an agrarian to industrial nation in a very short time)

Weaknesses of Command Economy Not designed to meet the wants and needs of individuals Lack of incentives to work hard leads to unexpected results Large bureaucracy for economic planning Not flexible in dealing with minor day to day problems People with new or unique ideas are stifled

Market Economy People and firms act in their own best interest to answer economic questions

Market Economy Markets allow buyers and sellers to come together in order to exchange goods and services

Strengths Markets can adjust over time Freedom exists for everyone involved Relatively small degree of governmental influence Decision making is decentralized Variety of goods and services are produced High degree of consumer satisfaction

Weaknesses The primary weakness is deciding for whom to produce The young, sick and old would have difficulty in a pure market environment Markets sometimes fail ◦ Competition (monopolies may develop) ◦ Resource mobility (resources are sometimes hindered from moving about) ◦ Availability of information (producers often have more information than do consumers, which gives them advantage)

Mixed Economy Because the government plays a part in our economy we are not a true free market economy, instead we are called a modified free enterprise economy.

What is Economics? Unit Three

Capitalism Capitalism- a system in which people like you and me own our own labor, and the property, equipment, and other resources to make money.

Characteristics of a Free Enterprise Economy 1. Economic freedom 2. Voluntary exchange 3. Private property and freedom to enter into contracts 4. Profit motive

Economic Freedom You are free to: ◦ Choose your job ◦ Choose where and when you work ◦ Work for yourself or someone else ◦ Leave your job and to move to another job Businesses are free to: ◦ Choose which workers they want ◦ Figure out how much business they want to do

Voluntary Exchange People and businesses want to do business with each other. Nobody makes them do it. When people and businesses do business, they are made better off.

Private Property and Freedom to Enter into Contracts People have the right to do what they want with their own property. Private property gives people the motivation to work hard, save their money and invest. Private property motivates people to get ahead in life. Contracts are agreements made between people to buy and sell. Contracts are can be written or spoken, but either way we are legally bound to keep our agreements.

Profit Motive People are free to risk what they already own in order to make even more money. The chance at becoming rich makes many people become entrepreneurs. Profit- ◦ how much better off a person or business is after a period of time. Profit Motive- ◦ the force that makes people and businesses want to get more money

The Role of the Entrepreneur The entrepreneur brings together people, resources and equipment to make a profit. Entrepreneurs motivate the economy by always coming up with new ideas and ways of doing things. Because of all the money that entrepreneurs make, this makes other people want to go into business and compete, making all of us better off.

The Role of the Consumer Consumers are people like you and me who buy things and pay for services. We, the consumers, rule the free enterprise economy. Our choices decide what is made, bought and sold in the economy. CONSUMER SOVEREIGNTY

The Role of the Government Protector ◦ The government makes and enforces laws against:  False advertising, unclean food and medicine, pollution and unsafe products ◦ The government enforces laws against discrimination in the work place. ◦ The government enforces contracts. Provider and Consumer ◦ The government provides products and services that business don’t provide, like: schools, roads, an army, and welfare. ◦ The government is also a consumer because it buys things from businesses, like: fighter jets, aircraft carriers, submarines and tanks. Regulator ◦ The government regulates or makes rules for businesses to follow. For example, the government decides which frequency radio stations can broadcast on. The government also makes rules for running nuclear power plants. And so on and so on…….