Definitions 1. economics: the study of choices that people make to satisfy wants and needs ● Want Need

Definitions microeconomics: the study of behavior and decision- making of small units within an economy (ie…consumers, producers) macroeconomics: the study of behavior and decision- making of an entire economy (ie…inflation, unemployment, poverty)

The Dilemma 1. scarcity: condition that exists due to a limited amount of resources to meet unlimited wants and needs

The Dilemma 2. Shortage: When a good or service is unavailable

The Dilemma ● land: natural resources (ie…fossil fuels) 2. 3. factors of production: limited resources needed to produce goods and services ● land: natural resources (ie…fossil fuels) ● labor: human resources (ie…work force) ● capital: manufactured resources (ie…drill) ● entrepreneurship: risk-taker who pools resources together to create products

The Dilemma 4. Products ● good: physical object ● service: action performed for another

A factory is an example of this type of capital Physical

If you are running a business that employs ppl to provide service for others, you are this An entrepreneur

Iron ore, natural gas, fertilizer, soil and water are examples of this

An employees knowledge is this type of capital Human

This occurs when there are limited quantities to meet unlimited wants Scarcity

This occurs when a good or service is unavailable Shortage

What type of capital is a dishwasher? Physical

Choices, Choices, Choices! trade-offs: an alternative that is sacrificed when a decision is made ● individuals: exercise or read? ● businesses: wakeboards or snowboards? ● societies: “guns or butter”?

Choices, Choices, Choices! 2. opportunity cost: the value of the most desirable alternative that is given up when a decision is made

Choices, Choices, Choices! 2. Guns vs. Butter More money for military mean less consumer goods/food 3. A decision making grid can help you determine the opportunity cost of your decision 4. Making a decision "at the margin" is when you look at every increment of the curve & decide which increment has maximum benefit for minimum cost

The most desirable alternative given up for a decision Opportunity cost

A decision between spending for military and spending for consumer goods is called Guns vs. butter

This can help you determine some of the opportunity costs of your decision Decision making grid

When you have a choice and you choose one thing and give up another, the one you didn’t choose is called Opportunity costs

Production Possibilities Curves 1. What it shows a. efficiency & growth or contraction of economy b. alternative ways to use an economy's resources. An efficient economy uses its resources to make the most goods & services c. Whether an economy has grown or shrunk 2. The opportunity cost of the decision to produce more of one good or service 3. Increasing costs = less output

max output due to efficient use of resources unattainable output given available resources underutilization or inefficient use of resources max output due to efficient use of resources

Production Possibilities Curves 4. Law of increasing costs: when an economy increases the production of one item, the opportunity cost goes up 5. PP frontier shows the max amount that an econ can produce 6. What causes curve to move a. to the left: loss of land, fewer workers b. To the right: more workers, new technology

This shows alternative ways to use economic resources Production possibilities curve

This type of economy uses its resources to make the most goods and services Efficient

The opportunity cost of a decision can be examined by using this Production possibilities curve

This curves when increased costs result in less output Production possibilities frontier

An economy that uses all of its resources to make the greatest possible number of goods and services is called _______________ Efficient

The maximum amount that an economy can produce is shown by this Production possibilities frontier

Production possibilities increase when this increases Technology

Which way would the production possibilities curve move if the US lost Texas to Mexico? Left

If something new was invented, which way would the PP curve move? Right

Quick Write Economic System What to Produce? How to Produce? For Whom to Produce? traditional: Social Units command: Government market: Individuals

Definitions economic system: the method used by a society to produce and distribute goods and services into the marketplace market: an arrangement that allows buyers and sellers to exchange things

Three Economic Questions What to produce? Military Goods Consumer Goods

Nationalized Industry (Regulation) Free Enterprise (Deregulation) Three Economic Questions How to produce? Nationalized Industry (Regulation) Free Enterprise (Deregulation)

Nationalized Industry (Regulation) Free Enterprise (Deregulation) Three Economic Questions How to produce? Nationalized Industry (Regulation) Free Enterprise (Deregulation)

Three Economic Questions For whom to produce?

Types of Economies 1. Traditional economy a. Relies on habits & customs to answer 3 econ questions b. children have the same jobs as their parents 2. Market economy (Free market) relies on supply & demand to answer 3 econ questions Economic efficiency, growth and freedom

Types of Economies 3. Command economy (centrally planned) a. Government makes all decisions (sets goals) & own all land & capital b. Each person has a job (lots of job security) c. Lacks incentive 4. Mixed economy: supply & demand AND govt make decisions

A Continuum of Mixed Economies North Korea Hong Kong Sweden United States China

Economic questions are what goods and services should be produced, how they are produced and who consumes these Goods and services

Children tend to have the same careers as their parents in this type of economy Traditional

The function of this is to distribute goods and services Economic system

Economic efficiency, freedom and growth can be achieved in this system Market economy

This type of economy relies on habit, custom or ritual to answer the three economic questions Traditional economy

Free Market Economy 1. Specialization: make economy more efficient 2. Markets exist to allow people to buy what they need to consume & sell specialized goods & services the produce a. factor market: firms purchase factors of production from households b. Product market: households purchase the goods that firms produce c. govt interferes more now

Free Market Economy 3. Adam Smith and the Wealth of Nations self-interest: the pursuit of personal financial gain provides incentive or motivation in a free market, which results in a more prosperous society invisible hand: the mutual interest of consumers and producers to pursue financial rewards is the regulating force in a free market

Free Market Economy Adam Smith and the Wealth of Nations ● laissez-faire: a policy of “letting them do as they please” with no government interference in the market result in a prosperous society laissez-faire: a policy of “letting them do as they please” with no government interference in the market results in a prosperous society

Free Market Economy 4. Advantages ● economic efficiency: competition ensures an efficient use of resources, which results in the availability of quality products at reasonable prices

Free Market Economy Advantages ● economic growth: incentive to profit promotes innovation, which results in the start-up of businesses and the creation of new jobs, technology and wealth

Gross Domestic Product in 2008 Rank Country GDP 1 United States $14,264,600 2 Japan $4,923,761 3 China $4,401,614 Source: International Monetary Fund

Free Market Economy Advantages ● economic mobility: economic choice and freedom can provide the opportunity for individuals who establish a positive “work ethic” to better themselves

Free Market Economy Advantages ● economic mobility: economic choice and freedom can provide the opportunity for individuals who establish a positive “work ethic” to better themselves

Income Mobility in United States

Free Market Economy 5. Disadvantages ● socioeconomic inequity: disparity in the distribution of wealth creates poverty, which contributes to social woes such as crime, illness, etc.

Income Distribution in United States Source: Wikipedia

Income Mobility in United States

Free Market Economy Disadvantages ● economic exploitation: corporate greed contributes to the deterioration of the environment and viability of a shrinking middle class

Exploitation of Environment: Pollution Source: Carbon Dioxide Information Analysis Center

Exploitation of Workers: Outsourcing

Exploitation of Workers: Insurance Source: U.S. Bureau of Labor Statistics

Free Market Economy Disadvantages ● economic instability: deregulation creates “boom or bust” markets, in which unplanned and explosive economic growth is interrupted by periods of stagnation and/or recession

Boom or Bust: Instability in Market

Free Market Economy 6. Role of govt: to allow individuals to operate their business in ways that they think will maximize profit 7. Needs govt intervention to provide for things the market place does not address 8. motivating force: self interest, profit

One advantage of this economic system is that it encourages growth Free market

These exist to allow ppl to buy what they need and consume and sell goods they produce Markets

In a free market system, the role of this is to allow businesses to maximize profits

When firms purchase the factors of production from households, its called this Factor market

Government intervention To provide for things the marketplace does not address, the free market economy needs this Government intervention

This motivates a manufacturer to sell a product Profit

He was a free market philosopher Adam Smith

The market in which a household purchases the goods and services that firms produce is called this Product market

This is the motivating force behind the free market system Competition or self interest

This type of market offers a wide variety of goods and services Free market

Centrally Planned Economy 1. Socialism: use democratic means to distribute wealth; equality can only exist with political equality, use democratic means to distribute wealth evenly The Redistribution of Wealth private ownership = 80% public ownership = 20% government’s role: control the essential factors of production in order to provide basic necessities, such as education, health care, transportation, etc.

Centrally Planned Economy 2. Advantages of Socialism socioeconomic equity: a more equal distribution of wealth results in a larger middle class reduced poverty: contributes to less social woes such as crime, illness, etc.

Income Inequality Metric in 2005 Country Gini Index Denmark 24.7 Norway 25.8 United States 40.8 Source: United Nations

Murder Rate per 100,000 in 2007 Country Murder Rate Norway .78 Sweden 1.0 United States 5.5 Source: United Nations

Life Expectancy Rate in 2007 Country Life Expectancy Sweden 80.9 Norway 80.2 United States 78.2 Source: United Nations

Centrally Planned Economy Advantages of Socialism ● economic stability: regulation stabilizes market which creates steady growth

Unemployment Rate in 2007 Country Unemployment Rate Denmark 1.6 Norway 2.1 United States 6.1 Source: United Nations

Centrally Planned Economy 4. Disadvantages of Socialism ● “big government:” large bureaucracy to plan and provide social services ● tax rate: 50%!

Centrally Planned Economy Disadvantages of Socialism ● less incentive: lack of motivation!

Centrally Planned Economy 5. Communism: Central planned economy; central govt has all political & economic power uses propaganda to inspire workers to increase production authoritarian, violent revolution

Centrally Planned Economy Soviet Union Lenin introduced communism & central planning to Soviet Union no incentives to produce led to inefficient agriculture & industry Difficult transition from communism to market economy  workers lose job security & guaranteed income China: in transition from communism to market economy—mixed, but centrally planned

Centrally planned economy In this system, government owns all land, makes all economic decisions and everyone has a job Centrally planned economy

This country is an example of an economy that is mixed, but leans toward central planning China

This Soviet leader introduced central planning Lenin

When transitioning from central planning to a market economy, workers would lose this Job security

Entrepreneurs would most likely prefer this type of economy Market

There is little individual freedom, workers lack incentive and consumers needs are not met in this type of economy Centrally planned

There is more interference by this now than there was during Adam Smith’s time Government

Benefits of Free Enterprise 1. free enterprise: gives consumers freedom to make econ choices profit motive legal equality: guaranteeing same legal rights will maximize human capital private property competition

Benefits of Free Enterprise 2. role of consumers Make desires known through purchases interest groups: private organizations that attempt to influence public officials to vo te in ways that will benefit their group members

Benefits of Free Enterprise 3. disclosure laws: companies give consumers important info about products so that they are safer & more knowledgeable 4. Negative effects of regulation Costs Less profit less growth Higher prices govt spending

A private organization that tries to influence public officials to act or vote in ways that will benefit the group’s members is called this Interest groups

This group makes their desires known to businesses by the purchases they make Consumers

Fuel efficiency stickers on cars are examples of this Disclosure laws

Guaranteeing these will maximize the use of human capital Legal equality

Businesses often find these costly to implement Government regulations

Giving consumers the freedom to make choices is the purpose of this The free enterprise system

Private property rights Profit motive, legal equality, competition and this are the basic principles of the free enterprise system Private property rights

Public disclosure laws These require competition to give consumers important information about their products Public disclosure laws

Promoting Growth & Stability 1. GDP: Total goods & services produced in a major prolonged fluctuation on the economy 2. business cycle: major prolonged fluctuation in the economy-- --market changes, not day to day

Promoting Growth & Stability 3 Promoting econ growth high employment steady growth stable prices 4. Technology & productivity Makes an economy stronger, more efficient creates a higher standard of living by providing additional goods & services

Promoting Growth & Stability 5. Constitutional protections property rights, protection of private property Taxation: ppl have to pay the same amount binding contracts 

This makes the economy stronger and more efficient Technology

To promote this, the government grants this group copyrights and patents Inventors

This is a major, prolonged fluctuation, not a day to day movement Business cycles

The total value of all goods and services produced in an economy Gross Domestic Product (GDP)

This guarantees private property, limits taxation and gives ppl the write to make contracts US government

Policy makers try to maintain growth, stabilize government and keep this low Unemployment

This creates a higher standard of living by providing additional goods and services Technology

Providing public goods 1. Benefits to society are greater than costs 2. Examples: highways, libraries, national parks 3. free rider: you benefit whether you pay or not (ex. PBS) 4. Externalities Positive: side effect that is good Negative: side effect that is bad

An economic side effect that has unexpected benefits Positive externality

If you consume a good or service but don’t pay for it, you are this Free rider

If total benefits to society are greater than total costs, its called this Public good

A highway is an example of this Public good

An economic side effect that has unexpected undesirable consequences is called this Negative externality

Providing a Safety Net 1. Safety net provides for injured workers (Ex. OSHA)  Joblessness  national disaster (FEMA)

Providing a Safety Net 2. redistribution programs TANF: gives cash to state for welfare programs Social security: cash payments to elderly & disabled, retirement income from elderly unemployment insurance workman's comp in-kind benefits: food stamps, subsidized housing (Section 8)

Unemployed benefits would be considered this A redistribution program

Cash provided to states to run their welfare program is provided by this organization TANF

Retirement income for the elderly is provided by this fund Social security

Section 8 housing is an example of these type of benefits In kind

This program takes money from your pay to give it to elderly and disabled ppl Social security