The Economic Way of ThinkingAcademic Decathlon Lesson 1 Berryhill Economics
Economics “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.” --John Maynard Keynes
Economics—What is it? Social science—why? Because it deals with people and their choices. Definition: Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.
Economics—What is it? A simpler definition: Economics is the study of allocating scarce resources to meet alternative ends. An even simpler definition: Economics is the study of making necessary choices.
The Fundamental Economic Problem The fundamental economic problem facing all societies is that of scarcity. Definition: Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have.
The Economic Problem Scarcity exists because human wants are unlimited and resources are finite (limited) Finite resources restrict the ability to produce. What are resources?
Factors of Production Resources are things we need to make other products. They are our FACTORS OF PRODUCTION. Definition: Production—process of creating goods and services—takes place when all needed factors of production are available.
Factors of Production Factors of Production are land, labor, capital and entrepreneurship Definition: Land refers to “gifts of nature,” or natural resources not created by humans. This includes land, forests, mineral deposits, livestock, sunshine, climate, etc.
Factors of Production Definition: Labor is people, their time, skill, efforts, and abilities used to produce a good or service. An example is people’s ability to work.
Factors of Production Definition: Capital is the tools, equipment, machinery, and factories used in the production of goods and services. This includes any equipment used to make something else like a bulldozer, a computer, and even money (known as financial capital).
Factors of Production Definition:Entrepreneurship is the special human resource, distinct from labor, that gives growth and forward movement of production in a society. Entrepreneurs take the initiative to produce a good or service, they make basic business-policy decisions, they are innovators that commercialize and develop new products, and they are risk takers that use their time and money to produce things with no guarantee of profit.
Factors of Production These factors of production must be present for production to begin. Definition: Production is the process of creating goods and services and production will take place only when all needed factors of production are available.
Three Basic Questions Because we live in a world of relatively scarce resources, we have to make wise economic choices. Each society must answer these three basic questions to make decisions about the ways our limited resources will be used.
Three Basic Questions WHAT to produce? --military equipment or other items such as food, clothing, or housing? HOW to produce? --mass production methods that require a lot of equipment and few people or should they use less equipment and more workers?
Three Basic Questions FOR WHOM to produce? --once the society knows what and how it is producing, these goods and services must be allocated to someone. How do they decide who gets what?
Different Societies Different societies will choose to answer these economic questions differently. How a society chooses to answer the questions will determine what type of economy we label that country as having.
Traditional Economies In traditional economies, the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. Usually, habit and custom also dictate most social behavior, and individuals are not free to make decisions on what they want or would like to have.
Traditional Economies Can anyone think of any traditional economies that exist today? Are there any instances of traditional economies in our society today?
Traditional Economies Advantages --Everyone knows their role—WHAT questions answered for them --Everyone knows HOW to produce (same as their parents did before them) --FOR WHOM questions answered by customs and traiditions
Traditional Economies Disadvantages: --Discourages new ideas (and therefore new economic growth) --Lack of progress leads to lower standard of living
Command Economies A command economy (may also be referred to as a PLANNED economy) is one in which a central authority makes most of the WHAT , HOW, and FOR WHOM decisions. Economic decisions are made by the government: the people have little, if any, influence over how the basic economic questions are answered.
Command Economies Can anyone think of some examples of command economies that exist today or have existed in history? Are there any instances where our society has command economy traits?
Command Economies Advantages: --Can change direction in a relatively short period of time --There is little uncertainty about one’s role in the society --Government provides social reforms/programs for little to no cost to the public
Command Economies Disadvantages: --Not designed to meet the wants of consumers --System does not give people incentive to work hard --Large decision-making bureaucracy --No flexibility --Little to no rewards for individual incentives
Market Economies In a market economy people and firms act in their own best interest to answer the WHAT, HOW, and FOR WHOM questions. A market is any mechanism that allows buyers and sellers to find each other and trade their goods and services. People’s decisions influence the WHAT, HOW, and FOR WHOM.
Market Economies Can anyone think of any examples of market economy today or in history? Any examples of a market economy in our own society?
Market Economies Advantages: --Can adjust to change over time --High degree of individual freedom --Relatively small degree of government interference --Decision making is decentralized (not given to the central government) --Variety of goods and services available to consumers --High degree of customer satisfaction and standard of living
Market Economies Disadvantages: --Doesn’t provide basic needs for everyone in the society (poor, elderly, sick) --Doesn’t provide public services (system of justice, national defense, health care) --High degree of uncertainty --Must be reasonably competitive, resources must be reasonably free to move from one activity to another, and consumers need access to adequate info to make wise decisions or economy can fail very easily
Mixed Economy An economy in which there are some elements of a traditional economy, some elements of a command economy, and some elements of a market economy What the U.S. is said to have