Basic Economics Unit One
I. What is Economics?
A. Study of Choice
- All decisions involve choices
- Resources are finite or limited.
- Human needs and wants are unlimited.
- Needs – necessities (water, food)
- Wants – luxuries, things not needed.
- Scarce – when there is a limited amount of an item.
- Shortage – a sudden shortfall of a product.
- Trade offs – always two or more options in our choices.
- Costs – What is given up when making a decision.
- Butter = Domestic Spending
- 4. Presidential Decisions
5. Production Possibilities Curve
- A graph that shows alternative ways to use an economy’s resources.
- Efficiency – Using resources to maximize production of goods and services.
- Underutilization – Using fewer resources than an economy is capable of using.
- Cost – To an economist, countries give up on ideas, products.
- Law of Increasing Costs –Cost of producing the second item increases.
- Entrepreneurs use the Factors of Production
- Physical Capital - All human-made goods
- Human Capital – The skills and knowledge gained by a worker through education and experience.
- Thinking at the Margin – taking into consideration the consumption of one more unit.
II. Different Economies
A. Answering the Three Economic Questions
- What goods and services should be produced?
- How should goods and services be produced?
- Who consumes goods and services?
- Who and how these questions are decided is one of the most significant questions in economics.
B. Economic Goals and Societal Values
- Economic Efficiency- Societies attempt to produce most out of their resources.
- Economic Freedom- Unlimited choices.
- Patriotism- The love of one’s country
- Many feel the USA should ensure economic freedom.
- Instead of economic or political freedoms, China favors freedom from poverty instead.
C. Economics and Values
- Traditional Economy –relies on habit, custom, or ritual,
- Slow to change, but evolve into other economies.
- These rely on bartering, are inefficient.
- Market Economy –production and consumption are based on exchanges people make.
- Command Economy – central authority is in control (Moscow in Soviet Union).
- Mixed economy – in between command and market.
D. Adam Smith Wealth of Nations
- Thought self-incentives like profit motivated people.
- Companies work to provide best product and lowest price to beat competitors.
- Marketplace automatically fixes itself – principle known as invisible hand.
- Government should stay out of economy – policy known as laissez faire.
E. Marx & The Communist Manifesto
- Marx & Engels (his co-author) had the following ideas about people & their delusions: They…
- Want things like TV, cars, big houses (materialism).
- Were power hungry (rich controlled poor).
- Used religion, alcohol, drugs -to relieve themselves of reality.
- Workers (proletariat) were to revolt against the rich (bourgeois) & take over government, means of production.
- Socialist society evolves - people distribute wealth evenly & no more oppression.
- Eventually people would not be greedy and no longer need government, live in harmony, in a communist state.
- PROBLEM - Dictators can take over easily & create an authoritarian regime.
F. Modern Economics and Mixed Economies
- Countries slide on economic continuum that ranges from command to free.
- China is now involved in a transition period to move toward privatization (free).
- Most nations strive to become as free as possible and let decisions be made in the private sector.
- The USA is also privatizing (more businesses, less regulations.)
III. American Economy
A. Free Enterprise, Yesterday and Today
- America’s birth was marked by wishes for new freedoms and less taxes.
- Over time problems have to be met by solutions from the gov’t. Follows these steps:
- Market failure: something the private sector cannot do.
- Public interest –people want gov’t to intervene if the economy cannot provide.
- Public policy –Government responds with laws.
- Interest groups lobby politicians, or give them ideas.
- Healthcare – unfulfilled.
- Transportation – too big for companies.
B. Providing Public Goods
- Cost of public goods is spread more evenly.
- The cost would be higher if it were provided privately.
- These generally benefit society as a whole.
- Benefits in the economy can be counted through cost and profits. Others are behind the scenes or side effects.
- Positive externalities: Wal-Mart moving close to town will increase property values.
- Negative externalities: Coal burning power plants = exhaust that may harm breathing – Government responds with pollution laws.
C. Tracking Our Successful Economy
- Macroeconomics/Microeconomics = Big/Small
- Gross Domestic Product – Income of a whole nation.
- Business Cycle – Expansion and contraction.
- Technology –Anything used to help produce (biggest advantage for USA) has.