Chapter 1 Economics – study of the choices that consumers and producers make. Capitalism – United States Economic System. Laissez Faire – Free Enterprise – Private Property- Adam Smith – the “Wealth of Nations”

4 factors of Production Human Resources Capital Resources Natural Resources Entrepreneurship

Scarcity – limited resources The Fundamental Economic Problem Unlimited needs and wants with limited resources = scarcity which leads to choices for producers.

3 Basic Economic Questions What to Produce? How to Produce? For whom to Produce for?

Trade Offs and Opportunity Costs Trade offs - Alternatives –giving up one thing for the use of another Opportunity Cost - The next best choice (with the most value) that an individual chose not to do.

The Production Possibilities Frontier – PPC One company making two products – with only so many resources, a company must choose to produce more of one thing, while producing less of the other thing. hotdogs hamburgers

PPC continued … Trade offs and opportunity costs As a entrepreneur – you must decide which product is in more demand and concentrate your production efforts on the item in more demand by the public.

Economic Theory / Marginal Analysis Simple theory designed to make sense of the world around us. Ex – pound on the vending machine to make the quarter fall. Marginal cost vs. marginal benefit -Does the cost of the product exceed the benefit? If so, do you buy?

Circular Flow Model Types of exchanges : Households and Government -households provide resources to the government for income -households pay taxes to the government for services Households and Businesses -households provide resources to businesses for income -households pay businesses for products

Circular Flow Model Cont. Businesses and Government -businesses provide products to the government for money -businesses pay taxes to the government for service

Forms of exchange Barter - trade – ancient societies Money – measure of value Credit – borrowed money

Chapter 2 Economic Systems

Traditional Economy Based on custom and tradition Products produced and distributed among the groups Only items that are necessary are produced Rarely used today

Command Economy Government officials make decisions Planned economies Ancient system – not seen today

Market Economies Individuals hold control and answer the three basic economic questions Self-interest System is set up to reward people – incentives exist Creates a class system

Mixed Economies Authoritarian / Communism – government controls all factors of production Example – U.S.S.R. Capitalism – government involvement is limited Example – U.S.A. Democratic Socialism – government ownership is limited to key industries Example - Canada

Five features of the U.S. Free Enterprise System Free enterprise – an economic system in which business can be conducted freely with limited gov. involvement. Private property – people have the right to own private property and enter into contracts. Engage in economic competition! Make decisions based on self-interest! Participate in the economy with limited government involvement!

Key terms : Utility - usefulness of a product - The utility of a certain good can vary from person to person. Self – sufficiency – when you can fulfill all your needs with no outside influence Interdependence – when one area or region is affected because of the events and incidences that occurred in another region.

Key Terms cont. Productivity – level of output that results from a given level of input Efficiency – the use of the smallest amount of resources to produce the greatest amount of output Division of labor – assigning a small number of tasks to each worker Specialization – the focus on one activity

Comparative v. Absolute Advantage Comparative advantage – the worker, firm, region, or country with the lower opportunity cost of producing a particular output should specialize in that output Absolute advantage – being able to do something using fewer resources than other producers