Economics The Economic Problem Scarcity Absolute & Comparative Advantage Opportunity Cost Economic Systems Free Trade v. Protectionism v. Fair Trade

The Economic Problem UUnlimited Wants LLimited Resources Land Labor Capital RResource Use CChoices A wind farm. Copyright: Getty Images, available from Education Image Gallery

Scarcity  How do you meet/fill unlimited wants with limited resources???  That is the “Economic Question” Unlimited Wants + Limited Resources = Scarcity

Supply and Demand  The more money a firm can charge for a product the more that product will be produced  The less money a consumer can purchase a product for the more that product will be purchased  Where supply and demand intersect is the equilibrium or Optimum Production

The Economic Problem  What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing?  How should goods and services be produced? – labor intensive, land intensive, capital intensive? Efficiency?  Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard?  How do individuals & governments choose how to answer the economic question? – Economic systems, Free Market Capitalism, Communism, Mercantilism, Socialism, ect.

Absolute Advantage  When one country (or firm, or individual) can produce more output per unit of productive input than another.  They can make more for less than their competitor.

Comparative Advantage  comparative advantage explains how it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good.  What matters is not the absolute cost of production but the opportunity cost, which measures how much production of one good is reduced to produce one more unit of the other good.

Opportunity Cost  Definition – the cost expressed in terms of the next best alternative sacrificed Helps us view the true cost of decision making Implies valuing different choices

Comparative Economic Systems Command Economies  Social Welfare programs Welfare, Social Security Public Education/ Health Care Wants are met by government decisions Resources are allocated by government decisions Price and supply by government  Communism, Socialism Market Economies  Consumer and producer freedom of choice Wants are met by the market Resources are allocated by the market Price determined by market  Capitalism Traditional Economies  Rely on tradition and customs Least common – few if any in today’s world Rural, remote areas Generally only produce what consume No prices – exchanged by barter and trade  Feudalism

Trade  The theory is that any voluntary trade must benefit both parties, otherwise it would not be made.  More precisely, for a trade to occur both parties must expect a benefit

Free Trade  Free trade is a market model in which trade in goods and services are exchanged without government-imposed restrictions.  Restrictions Subsidies - To protect existing businesses from risk associated with change, by supporting businesses financially. Protective Tariffs – taxing imported goods in order to raise the price of those goods above that of domestic goods Quotas – Limits on the number of imported goods to prevent dumping of cheaper foreign goods that would overwhelm the market. Tax cuts - Alleviation of the burdens of social and business costs. Intervention - The use of state power to bolster an economic entity.  Free trade is argued to achieve maximum economic efficiency and overall productivity gains.

Protectionism  Protectionism is the economic policy of restraining trade between nations. Trade is restricted to protect domestic industries and jobs Restrictions are made by using: Subsidies, Protective Tariffs, Quotas, Tax cuts, Interventions, etc. Source: wikipedia.com

Fair Trade  international trade which promotes the payment of a fair price as well as social and environmental standards in areas related to the production of a wide variety of goods. Promote equity in trade prices/standards Works to ensure sustainability focuses in particular on exports from developing countries to developed countries, most notably handicrafts, coffee, cocoa, tea, bananas, honey, cotton, wine, fresh fruit etc  Goal: Help them move from a position of vulnerability to security and economic self- sufficiency

Globalization  In economics, globalization is the convergence of prices, products, wages, rates of interest and profits towards global norms. Globalization of the economy depends on the role of human migration, international trade, movement of capital, and integration of financial markets. The International Monetary Fund notes the growing economic interdependence of countries worldwide through increasing volume and variety of cross- border transactions, free international capital flows, and more rapid and widespread diffusion of technology.

Globalization  Economic globalization can be measured in different ways. These center around the four main economic flows that characterize globalization: Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population Labor/people, e.g. net migration rates; inward or outward migration flows, weighted by population Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population Technology, e.g. international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor- neutral' technological advances such as the telephone, motorcar, broadband)