Unit 1 – What is economics
Chapter 1.1 – scarcity and the science of economics
The fundamental economic problems
- Societies do not have enough productive resources to satisfy everyone’s wants and needs
- Scarcity – fundamental economic problem of meeting people’s virtually unlimited wants with scarce resources
- Economics – social science dealing with how people satisfy seemingly unlimited and competing wants with the carful use of scarce resources
- Need – basic requirement for survival, including food, clothing, and shelter
- Want – something we would like to have but is not necessary for survival
- There is no such thing as a free lunch
Three basic questions
- What to produce
- How to produce
- For whom to produce
The factors of production
- The factors of production – productive resources that make up the four categories of land, capital, labor, and entrepreneurs
- Land – resources or other gifts of nature not created by human effort
- Capital or capital goods – tools, equipment, and factories used in the production of goods and services
- Labor – people with all their efforts, abilities, and skills
- Entrepreneur – risk taking individual in search of profits
The scope of economics
- Gross domestic product – dollar value of all final goods, services, and structures produced within a country’s borders during a one-year period
- Using that comprehensive measurement of output, a country can analyze, explain, and predict the future.
Chapter 1.2 – basic economic concepts
Goods, services, and consumers
- Good – tangible economic product that is useful, relatively scarce, and transferable to others
- Consumer good – good intended for final use by consumers rather than businesses
- Durable good – good that lasts for a least three years when used regularly
- Nondurable good – good that wears out or lasts for less than three years when used regularly
- Service – work or labor performed for someone
- Consumers – people who use goods and services to satisfy their wants and needs
Value, utility, and wealth
- Value – monetary worth of a good or service as determined by the market
- Paradox of value – apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item
- Utility – ability or capacity of a good or service to be useful and give satisfaction to someone
- Wealth – sum of tangible economic goods that are scarce, useful, and transferable from one person to another
The circular flow of economic activity
- Market – meeting place of mechanism that allows buyers and sellers to come together
- Factor market – market where the factors of production are bought and sold
- Product market – market where goods and services are bought and sold
Productivity and economic growth
- Economic growth – increase in a nation’s total output of goods and services over time
- Productivity – measure of the amount of output produced with a given amount of productive factors
- Human capital – sum of people’s skills, ability, health, knowledge and motivation
- Investing in education can have substantial payoffs
- Division of labor – division of work into a number of separate tasks to be performed by different workers
- Specialization – assignment of tasks to the workers, factories, regions, or nations that can perform them more efficiently
- Economic interdependence – mutual dependency of one person’s, firm’s, or region’s economic activities on another’s
1.3 – economic choices and decision making
Tradeoffs and opportunity cost
- Trade-off – alternative that is available whenever a choice is to be made
- Opportunity cost – cost of the next best alternative use of money, time, or resources when making a choice
Production possibilities
- Production possibilities frontier – diagram representing the maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed
- Identifying possible alternatives
- Fully employed resources
- Opportunity cost
- Economic growth
Thinking like an economist
- Economic model – simplified version of a complex concept of behavior expressed in the form of an equation, graph, or illustration
- Models are based on assumptions
- Cost-benefit analysis – way of thinking about a choice that compares the cost of an action to its benefits
- Take small incremental steps towards the final goal
The road ahead
- Free enterprise economy – one in which consumers and privately-owned businesses have the freedom to operate for a profit with limited government intervention
- Standard of living – the quality of life based on ownership of necessities and luxuries that make life easier
- Economic issues are often debated during political campaigns
- Provides a framework for analysis – a structure that helps explain how things are organized and understand why and how the world changes
Chapter 2 – economic systems and decisions making
2.1 – economic systems
- Economic system – organized way in which a society provides for the wants and needs of its people
Traditional economies
- Traditional economy – economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit or custom
- Advantage – everyone knows what role to play
- Disadvantage – discourage new ideas and new ways to doing things
- Lower standard of living
Command economies
- Command economy – system with a central authority that makes the major economic decisions
- Advantage – can change direction drastically
- Disadvantage – ignore the basic wants and needs of customers; incentive to fill their quotas instead of producing a good product; requires a large decision-making bureaucracy; reward for individual initiative are rare in a command economy
Market economies
- Market economy – economic system in which supply, demand, and the prie system help people make economic decisions and allocate resources
- Market – meeting place or mechanism that allows buyers and sellers to come together
- Capitalism – economic system in which private citizens own and use the factors of production in order to generate profits
- Advantages – individual freedom; adjusts gradually to change over time; relatively small degree of government interference; decision making in decentralized; variety of goods and services; high degree of consumer satisfaction
- Disadvantages – does not provide for everyone; may not provide enough goods and services; high degree of uncertainty
Mixed economies
- Mixed economy – economic system that has some combination of traditional, command, and market economies
- Socialism – political and economic system in which the government owns and controls some factors of production
- Communism – economic and political system in which all factors of production are collectively owned and controlled by the state
- Advantages – provides assistance for some people who might otherwise be left out
- Disadvantages – cost of benefits can mean higher costs for citizens overall
2.2 – evaluating economic performance
