Unit 1 Notes: Fundamental Economic Concepts

1. Unit 1 Notes: Fundamental Economic Concepts

2. 1. Economics - Is the study of how people try to satisfy unlimited wants and needs through the use of scarce resources

3. 2. TINSTAAFL – “There is no such thing as a free lunch” - Nothing is free - Someone must pay for free items

4. 3. Scarcity – The fundamental problem faced by all societies - Society may not have enough resources to produce all things people want

5. 4. The Factors of Production: A. Land – gifts of nature B. Labor – People C. Capital – tools, equipment - Financial Capital – money to purchase capital

6. 5. Entrepreneur – A person who takes risks for profit - They are often considered the 4th Factor of Production

7. 6. Technology – Many economists add this to the factors of production - Technology includes any use of the land, labor, capital that produced goods and services more efficiently - examples – computers and robotics

8. 7. Each society must answer 3 basic economic questions: A. What to produce? Ex Tanks or cars? B. How to produce? Ex Robotic or by hand C. For whom to produce? Ex Consumers, military, or export?

9. 8. People make bad economic decisions: A. Failure to make a budget B. Not saving regularly C. Failing to distinguish between wants and needsD. Failing to adapt your lifestyle to changed economiccircumstances

10. 9. Ethical Foundations of Economics: A. Ethics – Consideration of right and wrong B. Is our commercial system based on “economics” or “greedonomics”? C. Ex of companies like Enron or people like Martha Stewart

11. D. Adam Smith – Father of modern Economics - appropriate to be self-interested but… - moral considerations generate self-restraint - greed is self-interest, without moral restraint - self-interest can advance interests of society - Sociability and Trust along with Competitive Markets and a System of Justice – creates conditions in which self-interest promotes the broader interests of society

12. 10. There are several segments of Economics: A. Description of Statistics: GDP, unemployment B. Analysis of Statistics: Why is gasoline expensive? C. Explanation of Economic Activity: How economies function D. Predict Future Trends: economic forecasting E. Economic Ethics: values and economic decisions

13. 11. Trade-Offs: Exchanging one thing for the use of another Ex – Time playing Xbox vs time studying 12. Opportunity Cost: Value of next best alternative Ex – Homework or working at Wal-Mart

14. PPF

15. PPF • *A *B *C • Points along the curve represent maximum output • Points inside the curve represent idle resources • Points outside the curve represent economic growth. • Frontier-maximum combination of goods /services that can be produced.

16. 15. Needs vs Wants: A. Need - An item necessary for survival Ex – food, clothing, water, shelter B. Wants – A way of satisfying a need Ex – need = food want = pizza

17. 16. Markets are Locations/Mechanisms that Allow for Buying and Selling: A. Factor Markets – Productive resources bought and sold B. Product Markets – Producers sell goods/services to consumers

18. 17. The Circular Flow Diagram – Illustrates the flow of goods/services and money in a market system 18. Markets have Evolved into Cyberspace – buyers and sellers interact throughcomputers without leaving their homes

20. 19. A Market Economy – one in which consumers and businesses answer the what, how, and for whom to produce Other terms – capitalism, mixed or free market economy

21. * Economic Systems and Decision Making: 1. Consumer Sovereignty – idea that consumers decide what will be produced 2. Economic System – Organized way of providing for the wants and needs ofsociety

22. 3. Economic Systems: A. Traditional – Customs and beliefs guide economic decisions - Advantages – Strong family ties, know what is expected of all - Disadvantages – Change is discouraged; few consumer goods Example – Nomadic herders in Mongolia

23. B. Command – The Government makes all decisions - Advantages – No career choices and few consumer goods - Disadvantages – lack of incentive to work; less inventiveness Example – North Korea

24. C. Market – Economic Decisions made by people - Advantages – individual freedom, competition, many consumer goods - Disadvantages – young and old excluded, prices change, slow tochange - Example – United States

25. 4. Social and Economic Goals of the United States are: A. Economic Freedom – to buy and sell most products B. Economic Efficiency – Use resources wisely, conserve C. Economic Equity – policies benefit everyone fairly

26. D. Economic Security – protection against layoffs E. Full Employment – everyone who wants a job has one F. Price Stability – Little fluctuation, change over time G. Economic Growth – economy over time will grow

27. 5. Trade-Offs Among Goals: sometimes goals conflict Ex – raising minimum wage causes prices to go up

28. 6. Main Characteristics of a Free Enterprise (Market) Economy: - Economic Freedom – Choose job and employer - Private Property Rights – own and control property - Voluntary Exchange – Buyers and sellers act freely - Profit Motive – work to make money and not forced to work

29. 7. Competition - Sellers compete with one another to attractcustomers while lowering prices - Consumers compete with one another to find the bestproducts at the lowest prices

30. 8. Role of the Consumer – is to reject products or prices they don’tlike

31. 9. Role of the Government – A. Protector – of consumers ex impure drugs, etc.. B. Provider – of goods and services, a consumer

32. C. Regulator – of competition in market place D. Promoter – of national goals

33. * Comparing Capitalism, Socialism, and Communism* 1. Pure Market Capitalism – Adam Smith said a market economywas largely self-regulating and didn’t require governmentinvolvement (laissez-faire)

34. A. based on prices, profit, private property B. Government’s Role is limited C. Individuals answer all economic questions Example – United States

35. - Pros of Market Capitalism: - consumer satisfaction - Freedom to choose - Producers supply what consumers want

36. - Cons of Market Capitalism: - Ignores public goods - produce only for those who demand - allows for businesses to fail, have unemployment and less productive resources

37. 2. Pure Socialism – Arose from dissatisfaction with living and working conditions during the Industrial Revolution A. The State owns most factors of production B. There is very little private property

38. C. Prices are set by the State a. Democratic (market) Socialism – works in elected framework ex – England b. Authoritarian Socialism – central government controlseconomy ex – China

39. - Pros of Pure Socialism: - people use election power - Addresses for whom directly

40. - Cons of Pure Socialism: - Government guarantee of jobs - little labor mobility - high taxes

41. 3. Communism – Karl Marx’ “Communist Manifesto” (Das Kapital) - Series of class struggles would eventually result in collective ownershipof all capital (property) - Proletariat – workers - Marx envisioned – Socialism as the stepping stone tocommunism - Example – North Korea

42. - Pros of Communism: - all workers are equal - no job uncertainty - centralized control and planning

43. - Cons of Communism: - no individual freedom - no incentive to work - little consumer satisfaction - few day to day changes

44. 4. Summary of Capitalism, Socialism, and Communism:

45. * 3 Theories: - Everyone has their opinion as to how the economy should operate. 1. Classical 2. Keynesian 3. Monetarist

46. 1. Classical: - Key premise: Competition is best for the market. - Competition creates better, cheaper products, more choices. - Supply creates wealth. - Smith’s “invisible hand”

47. - Encourage trade - Oppose excessive taxation - Stop monopolies, collusion and unions as they blockcompetition.

48. * Examples of classical theorists – Adam Smith, Ricardo,Tea Party, Ron Paul, some Republicans, Conservatives, libertarians, etc..

49. 2. Keynesian: - Key Premise: Competitive markets are flawed and cannot stayin balance. - Prices go up quickly but do not fall quickly - Full employment and production will not last - Gov’t must repair constant recessions.

50. - Slow inflation with tax increases and cut government spending. - Create demand during a recession by tax cuts and increased government spending. - Safety nets-social security, unemployment, minimum wageprograms