What is Economics? Is the study of how people choose to use their limited resources to satisfy their unlimited wants Important Parts of Economics– CHOICES SCARCITY
Scarcity The fundamental problem all societies face… Scarcity is the condition that results because people have limited resources but unlimited wants Wants > Resources Task! Identify a scarce resource. EVERYTHING IS SCARCE!
Three Basic Economic Questions What to produce? How to produce? For whom to produce? 3 Q’s are answered in order to make decisions about the ways limited resources will be used.
Answering the 3 basic economic questions in a Market Economy [i.e., U.S.] What to produce? What should we devote our resources to? What do the consumers want? How to produce? What methods should be used in production? What is most efficient? For whom to produce? Who can afford the product?
How do we satisfy our economic wants?
We buy goods or services!
Good – a physical object (tangible) that has been produced for sale
Durable – last 3+ years
Nondurable – last up to 3 years
Service – work done by someone else for which someone is willing to pay
How do we make goods & services? Use Factors of Production - The productive resources that go into producing goods and services Production Equation LAND + LABOR + CAPITAL = GOOD/SERVICE inputs output
Factors of Production LAND Also called Natural Resources Consider them “gifts of nature” such as air, soil, minerals, water, and plants LABOR Also called Human Resources Includes physical and mental activities that go into producing goods/services CAPITAL Includes tools, machines, buildings, and technologies ENTREPRENEUR Risk taker who is responsible for combining land, labor, and capital to produce goods and services Task! Why are entrepreneurs the driving force in our economy?
Economic Interdependence What does ‘interdependence’ mean? Is our world becoming economic interdependent or independent? Economic Interdependence: the actions of one part of the country (world) has an impact on what happens elsewhere
Circular Flow of Economic Activity Sell Goods & Services Buy Goods & Services Product Market Revenue Consumer Spending Circular Flowof EconomicActivity Individuals Households Business Firms Factor Payments Income Factor Market Buy Factors of Production to Make Stuff Sell Factors of Production Flow of Resources & Products Flow of Money
Understanding how all parts fit together Circular Flow of Economic Activity
Represents a market economy
2 main “markets”
Product Market: Factor Market:where goods and services where the 4 factors ofare bought/sold production are bought/sold
Shows interdependence between businesses and individuals
Making Choices to Deal With Scarcity People seek to maximize their utility when making decisions. This requires them to consider tradeoffs. Utility – the satisfaction of benefit a person receives from consuming a good or service Tradeoffs – the exchange of one benefit or advantage for another (alternate choices)
Examples… Some choices are easy to make… Hmm…Should I have pizza or a hoagie for lunch today? Other decisions are agonizing… Should I get out of bed and go to school today or should I sleep in? ALL TRADEOFFS HAVE ADVANTAGES!
Opportunity Cost When comparing the top 2 choices, it is the BENEFIT of the nextbestalternative that must be sacrificed to satisfy a want. Opportunity Cost – The best thing we give up to get what we want
Why it Matters Understanding the opportunity costs/tradeoffs of different choices in life makes you a better decision-maker! You always have to give something up…”There’s No Such Thing As a Free Lunch” Individuals, Businesses, & Societies incur tradeoffs when making decisions
Visualizing the Relationship…
Economic Systems An economic system is the way a society coordinates the production and consumption of goods & services. How a society answers the three basic economic questions determines which type of economic system they are! Three Types of Economic Systems: Command Traditional Market
Review of Economic Systems A traditional economy relies on custom and tradition to dictate production and consumption In a command economy, decisions about production and consumption are made by a powerful ruler or central authority In a market economy, individual producers and consumers coordinate economic activity.
The American Economic System We have a mixed economy! MARKET COMMAND
What type of economy is best? FREEDOM GOVERNMENT
The U.S. mixed economy In a mixed economy… Individuals: Own the factors of production Possess freedom to produce or consume Must operate under confines of law Government: Protects workers and consumers Regulates business and preserves competition Provide public goods/benefits
Circular Flow of Economic Activity – Mixed Economy Sell Goods & Services Buy Goods & Services Product Market Revenue Consumer Spending Individuals Households Business Firms Government Factor Payments Income Factor Market Buy Factors of Production to Make Stuff Sell Factors of Production Flow of Resources & Products Flow of Money
Characteristics of the American Economy
The government should let people (producers & consumers) make their own economic decisions, with few gov’t restraints
Foundation for Limited Government comes from ideas such as…
Capitalism: system where individuals can own the factors of production and make their own economic decisions
Laissez-faire: “let the people do as they choose”
#1: Limited Role of Government .
Individuals are free to control the factors of production & make economic decisions
However, there are some government regulations such as…
#2: Freedom of Enterprise
Consumers are free to buy what they want! The government may intervene when necessary though such as fixing prices. #3: Freedom of Choice DQ: Why do buyers control the marketplace?
The desire to work harder and/or creating new businesses and products to seek profits We get to keep our rewards!!! Ex. Overtime pay or patents Profit- $ left after all costs have been paid #4: Profit Incentive
#5: Private Property Property can be owned by individuals, not just the government. A Few Examples: Houses, land, cars, clothing, or intellectual property. You can own anything you can afford!! DQ: Can the government take away property?
#6 Competition Competition is the rivalry among businesses to win more business and make more profits The benefits of competition include: Higher levels of productivity Better quality products More products available LOWER PRICES!!!