INTRODUCTION TO ECONOMICS

INTRODUCTION TO ECONOMICS
UNIT 1 INTRODUCTION TO ECONOMICS

CHAPTER 1 WHAT IS ECONOMICS?

The foundation of economics
1.1 The foundation of economics

What is Economics? At its most basic level economics is the study of how people make choices when they face a limited supply of resources. Which movie to see? How many hours to study? What to eat?

How does scarcity force people to make economic choices?
Scarcity forces all of us to make choices by making us decide which options are most important to us. The principle of scarcity states that there are limited goods and services for unlimited wants. Thus, people need to make choices in order to satisfy the wants that are most important to them.

Scarcity and Choice The study of economics begins with the idea that people cannot have everything they NEED AND WANT A need is something like air, food or shelter that is necessary for survival A want is an item that we desire but that is not essential to survival, such as an sports car or a video game.

NEED A NEED IS SOMETHING LIKE AIR, FOOD, OR SHELTER THAT IS NECESSARY FOR SURVIVAL

A WANT IS AN ITEM THAT WE DESIRE BUT THAT IS NOT ESSENTIAL TO SURVIVAL

Why must people make such choices?
BECAUSE PEOPLE CANNOT HAVE EVERYTHING THEY NEED OR WANT, THEY MUST CONSIDER THEIR OPTIONS & DECIDE WHICH CHOICE FILL THEIR NEEDS BEST. ECONOMICS is the science that studies the choices of people trying to satisfy their wants in a world of scarcity Why must people make such choices? The reason is SCARCITY

SCARCITY The condition in which our wants are greater than the resources available to satisfy them. It is hard for people in a wealthy country to really understand the idea of scarcity. Our states are filled with goods and we have access to countless services. Since scarcity exists, we need a rationing device-some way to decide who gets what portion of all the resources available (prices are the most commonly used device).

Scarcity is not the same as shortage.
Scarcity in contrast always exists because our needs and wants are always greater than our resource supply SHORTAGE is a situation in which consumers want more of a good or services than producers are willing to make available at a particular price. This can be short term or long term During certain parts of the year you might see empty shelves for certain items, but soon the shelves are stocked Wars and weather (drought, freezing temps) can also create shortages

Opportunity Cost How does opportunity cost affect decision making?
Every time we choose to do something, like sleep in late, we are given up the opportunity to do something less, like study an extra hour for a big test. When we make decisions about how to spend our scarce resources, like money or time, we are giving up the chance to spend that money or time on something else.

What choice would you make?
This section is all about the decisions that we make each and everyday. For example, lets say you wanted to go to the Super Bowl. One option would be to buy tickets from a scalper ($ ). The other option is there is a contest on Clearwater Beach where you have to stand on a beach towel for 24 hours straight without leaving the beach towel. If you can do this you can buy tickets to the game for $1.00. What choice would you make?

Trade-Offs A situation in which having more of one thing means having less of something else The act of giving up one benefit in order to gain another, greater benefit Trade-offs involve things that can be easily measured such as money, property, and time or things that cannot be easily measured, like enjoyment or job satisfaction. Example: If you chose to play a sport at this school, it might prevent you from getting a part-time job, spending time with friends, and/or having time for homework.

Opportunity Cost Whenever individuals, businesses or governments decide on a course of action, they face many trade offs One alternative though, is usually more desirable than all others. The most desirable alternative given up as the result of a decision is called the opportunity cost Example: Every ordinary decision that we make involves an opportunity cost. For each of the following what would you chose? Sleep late or wake up early to go on a trip with friends? Sleep late or wake up early to eat your breakfast? Sleep late or wake up early to work on homework. Your decision for these questions is based on whatever you are willing to sacrifice.

Businesses and Governments
Businesses make trade-offs when they decide how to use their factors of production. A farmer who uses his or her land to plant broccoli, for example, cannot use that same land to plant squash. Governments also make trade-offs when they decide to spend their money on military needs instead of domestic ones, and vice versa.

Why didn’t they go to/finish college?

Opportunity Cost How does a nation decide what and how to produce?
To decide what and how to produce, economists use a tool known as a production possibilities curve. This curve helps a nation’s economists determine the alternative ways of using that nation’s resources.

Production Possibilities
Economists often use graphs to analyze the choices and trade-offs that people make. A production possibilities curve is a graph that shows alternative ways to use an economy’s productive resources. To draw a production possibilities curve, an economist begins by deciding which goods or services to examine.

Production Possibilities Curve
The table below shows six different combinations of watermelons and shoes that Capeland could produce using all of its factor resources.

Production Possibilities Frontier
The line on a production possibilities curve that shows the maximum possible output an economy can produce is called the production possibilities frontier. Each point on the production possibilities frontier reflects a trade-off. These trade-offs are necessary because factors of production are scarce. Using land, labor, and capital to make one product means that fewer resources are left to make something else.

Efficiency A production possibilities frontier represents an economy working at its most efficient level. Sometimes an economy works inefficiently and it uses fewer resources than it is capable of using. This is known as underutilization.

Growth A production possibilities curve can also show growth.
When an economy grows, the curve shifts to the right. However, when an economy’s production capacity decreases, the economy slows and the curve shifts to the left.

Cost Production possibilities curves can be used to determine the opportunity costs involved in make an economic decision. Cost increases as production shifts from making one item to another. The law of increasing costs helps explain the production possibilities curve. As we move along the curve, we trade off more and more for less and less output.

Law of Increasing Costs

Technology and Education
Technology can increase a nation’s efficiency. Many governments spend money investing in new technology, education, and training for the workforce.

1.1 Review Questions Because scarcity exists, people must make choices. Explain why? Give an example to illustrate how a person may incur an opportunity cost without paying anyone money Is the opportunity cost of attending high school the same for all high school students? Explain why or why not. Why are some concert tickets or sporting event tickets more expensive than others? Jack is planning on going to college in a few months. The tuition is $10,000 a year. Assuming that Jack goes to college for four years, is the opportunity cost of attending college $40,000? Why or why not?

The ECONOMIC WAY OF THINKING
1.2 The ECONOMIC WAY OF THINKING

Thinking in Terms of Costs and Benefits
According to an economist, almost everything we do involves costs (negatives, disadvantages) and benefits (positives, advantages). There are costs and benefits to Learning economics Eating a hamburger Driving your car Asking a person out on a date Taking a vacation If the costs are perceived to be greater than the benefits, then the person will not make that decision

Using a Decision – Making Grid
At times, a decisions opportunity cost may be unclear or complicated. Using a decision making grid can help you determine whether you are willing to accept the opportunity cost of a choice you are about to make.

Decision – Making Grid Decision-Making Grid Alternatives Sleep late
Wake up early to study Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction Benefits forgone (Costs) Opportunity Cost Extra time to study Extra time to sleep By looking at this chart we can assume that most practical people would decide to wake up early. We always face an opportunity cost though. When we select one alternative, we have to sacrifice at least one alternative and forgo its benefits

Thinking at the Margin When looking at decisions there is one more characteristic in addition to opportunity cost. Many decisions involve adding one unit or subtracting one unit, such as one minute or one dollar. When you decide how much more or less to do, you are thinking at the margin. Deciding by thinking on the margin involves comparing the opportunity costs and benefits. This decision-making process is called a cost/benefit analysis.

Marginal Costs and Benefits
To make good decisions on the margin, you must weigh marginal costs against marginal benefits. The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or building one extra house. The marginal benefit is the extra benefit of adding the same unit. Once the marginal costs outweigh the marginal benefit, no more units can be added

Making a Decision at the Margin
When we looked at the previous chart we looked at it from the “ALL OR NOTHING” approach. You were either going to wake up early to study or sleep late and not study at all that morning. In reality you could decide from among several other options rather than just the two. You could decide to get up one, two, or three hours early to study or sleep. Making a decision about each extra hour would mean that you were thinking at the margin.

Decision Making at the Margin
Options Benefit Opportunity Cost 1st hour of extra study time Grade of C on test One hour of sleep 2nd hour of extra study time Grade of B on test 2 hours of sleep 3rd hour of extra study time Grade of B+ on test 3 hours of sleep

Decision-Making on the Margin
Like opportunity cost, thinking at the margin applies not just to individuals, but to businesses and governments as well. Employers think at the margin when they decide how many workers to hire. Legislators think at the margin when they decide how much to increase government spending on a particular project.

Incentives Something that encourages or motivates a person to take action Economics is all about figuring out how to “motivate” someone or something to act a certain way. It may be a punishment or reward People respond to incentives because people make decisions by comparing costs and benefits Why did you come to class today? How much money would it take for you to shave your head? Lose ten pounds?

Thinking in Terms of the Small and the Big
Economics is divided into two branches: Microeconomics-deals with human behavior and choices as they relate to relatively small units-individuals, firms, and markets Macroeconomics-deals with human behavior and choices as they relate to the entire economy

1.2 Review Questions According to economists, almost everything we do has costs and benefits. Identify the costs and benefits of each of the following: getting a dental check-up and getting an extra hour of sleep. What is the difference between microeconomics and macroeconomics? Describe the types of economic incentives that work for you. Describe a recent situation in which you weighed the marginal costs versus the marginal benefits to make a decision. If you see a penny on the ground, do you pick it up? Why or why not?

BASIC ECONOMIC LANGUAGE
1.3 BASIC ECONOMIC LANGUAGE

GOOD AND SERVICES GOODS are physical objects that someone produces such as clothes and shoes. SERVICES are actions or activities that one person performs for another.

All goods and services we produce are scarce.
No one person can have an endless supply of everything. Sooner or later, a limit is always reached. At its core economics is about solving the problem of scarcity

Utility The quality of bringing satisfaction or happiness
The more utility a good or services brings us, the more we are willing to want to buy it or use it

FACTORS OF PRODUCTION Economists call the resources that are used to make all goods & services the FACTORS OF PRODUCTION. They are land, labor, capital, and entrepreneurship.

FACTORS OF PRODUCTION LAND refers to all natural resources used to produce goods & services. They include fertile land for farming and products there are in or on the land, such as coal, water and forests.

Labor Labor is the effort that a person devotes to a task for which that person is paid. Labor includes the medical aid provided by a doctor, the tightening of a clamp by an assembly line worker, or the instructions of a teacher.

Factors of Production CAPITAL is any human made resources that is used to produce other goods & services Physical capital all human made goods that are used to produce other goods & services. Includes buildings and tools It is an important factor of production because it can save people & companies a great deal of time & money When we create or buy physical capital to accomplish a job, we usually become more productive

Factors of Production The benefits that you reap from this object will lower the cost of the product The typical benefits of physical capital are: Extra time used for other activities More knowledge understanding how to use technology More productivity can use your resources & labor to do additional activities that are beneficial

FACTORS OF PRODUCTION Human Capital the skills and knowledge gained by a worker through education & experience An economy requires both to produce goods & services

ENTREPRENEURS This is the group that pulls the 3 factors of production together Ambitious leader who combines land, labor, and capital to create and market new goods and services. They are individuals who take risks to develop original ideas, start businesses, create new industries, and fuel economic growth.

Entrepreneurs Entrepreneurs play a key role in turning scarce resources into goods and services. Entrepreneurs are willing to take risks in order to make a profit. They: -Develop original ideas -Start businesses -Create new industries -Fuel economic growth

Entrepreneurs, cont An entrepreneur’s first task is to assemble the factors of production: land, labor, and capital

Entrepreneurs, cont

1.3 Review Questions Identify the following resources/factors of production Amy’s work as a secretary Iron ore A farm tractor A computer used to write a book A comedian telling jokes on a television show Someone inventing a new product

Economic systems and the global economy
CHAPTER 2 Economic systems and the global economy

2.1 Economic systems

Three Economic Questions
All nations in the world must decide how they will produce and distribute goods and services because everything is scare and people have unlimited wants. In order to decide how to do this, nations must answer theses three questions. What goods and services will be produced? “What are you going to make?” How should these goods and services be produced? “How are you going to make it?” Who consumes these goods ands services? “Who gets the stuff?” How a nation answers these three economic questions defines its economic system. -(def) the way in which a society decides what goods to produce, how to produce goods, and for whom will be produced

Two Economic Systems Free Enterprise Socialism
An economic system in which individuals own most, if not all, the resources and control their use. Also called capitalism, free market, or a market economy Examples: United States, Australia An economic system in which the government controls and may own many of the resources Also called a command economy Examples: North Korea, Cuba Not all socialist economic systems are the same Communism Government controls all resources, very little private property, and the government has a very large role in people’s lives Decentralized Socialism People have a say in some of the resources, more private property, and the government oversees, but does not control every aspect of the economy

Two Economic Systems Free Enterprise Socialism
Adam Smith is considered the “father” of free enterprise thinking. He believed: Self-interest causes people to work hard and take risks, which benefits society The division of labor creates greater productivity and wealth Competition keeps prices down and quality up Government should provide national defense, a system of justice, and public works Karl Marx is considered the “father” of socialist thinking He believed: All value in produced goods comes from labor and as a result should go to labor (theory of value) Example: If you build a chair for a company worth $100 and they pay you $20, they are “stealing” money from you. Capitalists exploit labor Nations will progress through six stages of development, from primitive to pure communism

Major Differences between Free Enterprise and Socialism
Resources Free Enterprise-owned by individuals Socialism-owned by the government Incentives Free Enterprise-strong incentive Socialism-no incentives Government’s Role Free Enterprise- small role Socialism-large role Economic Plans Free Enterprise-no government plan Socialism-possible government plan

Major Differences between Free Enterprise and Socialism
Competition Free Enterprise-key component Socialism-controlled by government Income Distribution Free Enterprise-small part of tax policy Socialism-large part of tax policy Controlling Prices Free Enterprise-based on supply and demand Socialism-government has a say in prices Private Property Free Enterprise-encourages individuals Socialism-limited, causes unfair advantages

Mixed Economy In reality no country’s economic system is either pure free enterprise or pure socialist (North Korea the exception). A mixed economy is an economy that has some elements of both capitalism and socialism.

2.1 Review Questions What are the three economic questions?
Are all mixed economies the same? Explain your answer. What is Adam Smith’s position on self-interest? Explain Marx’s labor theory of value. What makes the United States a mixed economy?

2.2 GLOBALIZATION

What is Globalization? (def) a phenomenon by which economic agents in any given part of the world are affected by events elsewhere in the world In other words, everyone is affected not only by what happens in your country, but also by what happens in other countries. This can be both a positive and a negative Globalization is making countries more reliant on one another for goods and services.

History of Globalization

History of Globalization
Innovations in transportation (internal combustion engine, airplanes) and information (computers, world wide web) have increased the speed on globalization. Today many companies (called multinational corporations) operate in multiple countries Example: Nike Headquarters: United States Factories and offices in over 45 countries Products sold almost everywhere “It has been said that arguing against globalization is like arguing against the laws of gravity”

The Costs and Benefits of Globalization
Trade Standard of Living Increase Lower Prices More Innovation Increased Income Inequality Loss of Jobs Increased Power of Big Corporations

Three Fallacies About Globalization
A country is always better off if it exports many goods and imports very few goods. Why? Consumption matters Some countries will be made better off economically, but other countries will necessarily be made worse off. Why? Opportunity cost Businesses will always gravitate towards countries where wages are lower. Why? Efficiency/productivity matters

2.2 Review Questions In your opinion, what is the biggest benefit and biggest cost of globalization? Explain. How does changing technology have to do with globalization? Why might it be easier to recognize the costs of globalization than the benefits? Why might certain governments or government officials be cautious of globalization? How is your life impacted by globalization?

Chapter 15 Trade

Why do people trade? Obviously, different countries have different terrains, climates, and resources. Meaning- some countries can produce goods that other countries cannot produce or they can but at an extremely high cost. Example: Wisconsin could grow oranges in the winter….but they don’t Why? Products that are produced in the domestic country and sold to residents of a foreign country are called exports. Products that are produced in a foreign country and purchased by residents of the domestic country are called imports.

Absolute Advantage When it comes to trade, the term absolute advantage is used to describe when one country can produce more of a good than another country using the same quantity of resources. Example: U.S. can produce 150 units of oranges/ Japan can produce 100 units of oranges The U.S. would have the absolute advantage. JUST BECAUSE YOU HAVE AN ABSOLUTE ADVANTAGE OVER ANOTHER COUNTRY….IT DOESN’T MEAN THAT YOU SHOULD NOT TRADE WITH THEM!

Comparative Advantage
Nations trade when they have a comparative advantage, situation in which a country can produce a good at a lower opportunity cost than another country. When each nation decides to specialize and then trade, it makes both sides better off. It all comes down to the opportunity cost of the trade

Tom’s Production Quantity of coconuts 30 Tom’s production
without trade Figure Caption: Figure Production Possibilities for Two Castaways Here, each of the two castaways has a constant opportunity cost of fish and a straight-line production possibility frontier. In Tom’s case, each fish always has an opportunity cost of 3⁄4 of a coconut. 9 Tom’s PPF 28 40 Quantity of fish

Hank’s Production Quantity of coconuts 20 Hank’s production
without trade Figure Caption: Figure Production Possibilities for Two Castaways Here, each of the two castaways has a constant opportunity cost of fish and a straight-line production possibility frontier. In Hank’s case, each fish always has an opportunity cost of 2 coconuts. 8 Hank’s PPF 6 10 Quantity of fish

Tom and Hank’s Opportunity Costs
Tom’s Opportunity Cost Hank’s Opportunity Cost One fish 3/4 coconut 2 coconuts One coconut 4/3 fish 1/2 fish

Specialize and Trade Both castaways are better off when they each specialize in what they are good at and trade. It’s a good idea for Tom to catch the fish for both of them, because his opportunity cost of a fish in terms of coconuts not gathered is only 3/4 of a coconut, versus 2 coconuts for Hank. Correspondingly, it’s a good idea for Hank to gather coconuts for the both of them.

Comparative Advantage and Gains from Trade
(a) Tom’s Production and Consumption (b) Hank’s Production and Consumption Quantity of coconuts Quantity of coconuts 30 Tom’s consumption without trade Hank’s production with trade Tom’s consumption with trade 20 Hank’s consumption with trade Tom’s production with trade Figure Caption: Figure 2-5: Comparative Advantage and Gains from Trade By specializing and trading, the two castaways can produce By specializing and trading, the two castaways can produce and consume more of both goods. Tom specializes in catching fish, his comparative advantage, and Hank— who has an absolute disadvantage in both goods but a comparative advantage in coconuts—specializes in gathering coconuts. The result is that each castaway can consume more of both goods than either could without trade. 10 10 Hank’s consumption without trade 9 8 T o m 's Hank's PPF PPF 28 30 40 6 10 Quantity of fish Quantity of fish

How the Castaways Gain from Trade
Both Tom and Hank experience gains from trade: Tom’s consumption of fish increases by two, and his consumption of coconuts increases by one. Hank’s consumption of fish increases by four, and his consumption of coconuts increases by two.

Chapter 15 Review Questions
1.. The following figures represent the amount that can be produced with a fixed amount of factor inputs. Bananas Sugarcane Panama Honduras A. Which country has the absolute advantage in bananas? Which country has the absolute advantage in sugarcane? Explain how you arrive at that answer? B. What is Panama’s opportunity cost for producing one unit of bananas? What is Honduras’s opportunity cost for producing one unit of sugarcane? C. Which country has the comparative advantage in bananas? Which country has the comparative advantage in sugarcane? Should these countries trade? If so, how? D. Identify a terms of trade that benefits both countries? Explain why this will benefit Panama

CHAPTER 3 FREE ENTERPRISE

CHARACTERISTICS OF FREE ENTERPRISE
3.1 CHARACTERISTICS OF FREE ENTERPRISE

How Does Free Enterprise Answer the Three Economic Questions?
What goods and services will be produced? Based on what producers think consumers are willing and able to buy How should these goods and services be produced? Based on how the producers want to produce it-productivity/efficiency Who consumes these goods ands services? Based on what consumers are willing and able to buy In a free market economy self-interest and competition are the two key components that make the system work

Five Features of Free Enterprise-Private Property
Any good that is owned by an individual or a business as opposed to public property which is any good that is owned by the government Individuals have the right to own property and to purchase or sell whatever property they own

Five Features of Free Enterprise-Choice (Freedom to Choose)
Workers have the right to choose what they will do and for whom they will do it Businesses have the right to choose the products that they will produce Consumers have the right to choose the products they will buy

Five Features of Free Enterprise-Voluntary Exchange
Trade Individuals make themselves better off by entering into exchanges- by trading what they value less for what they value more Trade is necessary because no one is self-sufficient

Five Features of Free Enterprise-Competition
Consumers benefit from competition in the market place. Competition decreases prices and increases the quality of goods and services Competition also applies to the labor market.

Five Features of Free Enterprise-Economic Incentives (Self-Interest)
Incentives motivates or encourages a person towards an action In a free enterprise system incentives push companies to make better products because they have the incentive to make money In also pushes workers to provide “good labor” because they have the incentive to make money The desire to earn an income strongly motivates them to produce for others.

Circular Flow Model Free Enterprise
The circular flow model shows how households-an economic unit of one person or more that sells resources and buys goods and services- interact with firms (businesses) Factor Market- where households sell their land, labor, and capital in exchange for a wage Product Market- where firms sell their goods and services in exchange for set price

Circular Flow Model-Free Enterprise

Circular Flow Model-Mixed Economy

3.1 Questions How does voluntary exchange benefit a person?
What are the two advantages that consumers get from the competition between sellers? Make an argument for why selfishness is a good thing in a free enterprise system. What are the two key components of the free enterprise system?

PROFIT AND LOSS IN FREE ENTERPRISE
3.2 PROFIT AND LOSS IN FREE ENTERPRISE

Profits and Losses Profits Losses
The amount of money left over after all the costs of production have been paid Profit can also be described in terms of total revenue and total costs. Total revenue= price of good x number of units sold Total cost= average cost of a good x number of units sold Profit=Total revenue > total cost The amount of money by which total cost exceeds total revenue Loss= Total cost> Total revenue

Profit and Loss as Signals
Profits are a signal to businesses that they need to continue to produce the product or service because consumers are reacting in a positive way Profits attract more competition Vs. Losses are a signal to businesses that they might need to stop or change their product or service Some companies can sustain losses for a time as a strategy of long term growth, but it does has its risks Example: Amazon, Uber, Twitter Losses eliminate completion as smaller businesses can no longer finance their operations The role of consumers is to signal to businesses, telling them what to produce and how much

3.2 Questions What role do losses play in a free enterprise system?
What role do profits play in a free enterprise system? Are losses as important as profits to free enterprise? If the price is $40, and the number of units sold is 100, and the average cost is $35, what is the profit? If the average cost is $50, and the price is $40, and the number of units sold is 15, what is the loss?

Ethics of the free enterprise system
3.3 Ethics of the free enterprise system

Ethics The principles of conduct, such as right and wrong, morality and immorality, good and bad. We often evaluate people as being ethical or not, but we can do the same thing for an economic system Goals of an ethical system People can choose Allows individuals to choose their own occupations or professions Variety of Products Produces goods and services preferred by both the majority and the minority Rewards Depend on Performance Rewards or punishes producers based on how well or poorly they respond to the buying public Numerous Freedoms Supports the right of the individual to be free, including the freedom to acquire property, work where you choose, and start your own business

Economic Rights and Responsibilities in a Free Enterprise System
Open Disclosure Responsibility of truthfully relating to someone the facts about the product he/she is buying Obeying the Law Using it in respect to the law Being Truthful Not making “wild "claims about your product or making “wild” negative claims about a competitor

3.3 Questions 1. Is it ethical that Universal Pictures made $571 million dollars off the movie Fifty Shades of Grey? Explain your answer. 2. Why is it important for businesses to be open and honest about their products?

3.4 ENTREPRENEURS

Entrepreneurs A person who has a special talent for searching out and taking advantage of new business opportunities They create new opportunities and new products/services that benefits society by giving consumers more choices of goods and services One of the key characteristics of an entrepreneur is that they have to be willing to take risks. This is the only way that they can make a profit

3.4 Questions 1. How do entrepreneur’s risk taking activities benefit society?

ROLE OF GOVERNMENT IN A FREE ENTERPRISE ECONOMY
3.5 ROLE OF GOVERNMENT IN A FREE ENTERPRISE ECONOMY

Regulations Rules or laws that are designed to protect consumers
In a pure free enterprise system, there is very little regulations. In a country like the United States, regulations are put in place to protect consumers Examples Requiring companies to list the items in their products Protecting the environment Government regulations can have a downside For producers: costly rules that make the product more expensive to make For consumers: higher priced products

Role of Government in a Free Enterprise System
Promoting Economic Strength Employment- create policies that create more jobs (unemployment should be between 4-6%) Growth-the next generation should have a higher standard of living- which means the economy must continue to produce additional goods and services (government can cut taxes or increase spending to help the economy grow Stability-create confidence in the economy Provide Incentives for Innovations Giving grants for research and development of new products and technologies Granting patents and copyrights to protect inventors

Role of Government in a Free Enterprise System
Government as Enforcer of Contracts Government punishes people (jail, prison, fines) if people break their legal contracts Provider of Nonexcludable Public Goods A good that individuals cannot be excluded from consuming Public goods vs. Private goods Public goods-a good for which one person’s consumption does not take away from another person’s consumption Private goods-a good for which one person’s consumption takes away from another person’s consumption Example: National Defense, Street lights, Police

Why do we produce Nonexcludable Public Goods?
In a free enterprise system people are willing to produce private goods and excludable public goods (a public good that individuals can be excluded from consuming), but no one will want to produce nonexcludable public goods. Why? People will not pay for something that they cannot be stopped from consuming As a result, the government provides these goods to the public by using tax dollars What products to they provide? When the benefit to society outweighs the cost to society Example: Schools The problem? Free rider problem A person who receives the benefits of a good without paying for it The free rider problem is an example of a market failure-a situation where the free market on its own, does not distribute resources efficiently

Externalities Why don’t they sell gum at Disney?
Why is it cheaper to buy a house next to an airport? Why is it more expensive to get a hotel room on Clearwater Beach as opposed to across the street? Why are most flu shots free? Why does the government place a lot of taxes on tobacco? The answer is externalities Economic side effects Positive Externalities A beneficial side effect of an action that is felt by others Negative Externalities An adverse side effect of an act that is felt by others The job of the government is to limit externalities by creating rules or incentives to limit the impact on society

3.5 Questions Why don’t private businesses produce non-excludable public goods? How can taxes be applied to deal with negative externalities? Give positive and negative externality if they built a Dunkin Donuts across from PHUHS? Give an example of a free rider problem. Make one argument for and one argument against regulations.

INTRODUCTION TO ECONOMICS

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