Chapter 13 What is an Economy?

Section 1: Why Societies have Economies We all have wants and needs but no one can have everything. Wants: Things that we desire Needs: Things necessary for survival Economics is the study of how we achieve these wants and needs  Microeconomics: study of individual parts on an economy Macroeconomics: study of an economy as a whole

Goods: are things of value that can be seen or touched (tangible) to satisfy needs and wants ( Example: shoes and bikes) Durable Goods: goods that do not need to be replaced every year Non-durable Goods: goods that need to be replaced

Goods and Services must be made or produced Services: useful work that cannot be seen or touched (intangible) (ex. A waitress who brings a meal to your table is performing a service)  Goods and Services must be made or produced The business owners who make the disks, shoes and bikes are producers. Doctors, barbers and bus drivers are also producers. The users of goods and services are consumers.

What are economic resources? Things that go into the making of goods and services Three kinds of resources: Natural resources: things provided by the world around us. Capital: machines, tools and buildings used in the production of goods and services. Human resources: people who put everything together to make goods and services.

Why we must make economic choices? Trade-off: (economic choice) goods or services that must be given up in order to buy another one Scarcity: there is not enough of everything to go around all resources are limited Societies Must Decide 1. What goods and services to produce? 2. How goods and services will be produced? 3. And who should receive these goods and services?

What is the cost of every choice? Opportunity Cost: the cost of the best next alternative use of time and money when choosing to do one thing rather than another.   Ex. Suppose Congress votes $2 billion for projects to clean up polluted rivers. The opportunity cost of its vote is the next best alternative use of those same tax dollars. Congress could have voted for increased spending on space research. Then the opportunity cost of clean rivers would be fewer space flights.

Four Factors of Production Entrepreneurship - The function of combining and organizing natural resources, capital goods and labor; assuming the risks of business failure; and providing the creativity and managerial skills necessary for production to take place. Capital - A factor of production used by labor in making products such as tools, factories and machines Land/Natural Resources Productive resources that are provided by nature Example: air, land, water & coal Labor Any form of human effort exerted in production

Different Kinds of Costs All businesses have costs, but not all costs are the same - Fixed- expenses are the same no matter how many units are produced - Variable- Change with the number of products produced (Wages and raw materials). Increase as production grows - Fixed Costs + Variable Costs= Total Costs. Average total costs=Total Costs/ Quantity Produced -Marginal Costs- extra, or additional cost of producing one additional unit of output

Cost Benefit Analysis The cost-benefit analysis can be used to answer 2 of the 3 basic questions of economics: What to produce and for Whom.

- Marginal Revenue- the change in total revenue that results from selling one more unit of output Marginal Benefit- The additional or extra benefit of an action - Cost-benefit analysis- an economic model that requires you to compare the marginal costs and marginal benefits of a decision - If the costs outweigh the benefits we should reject the chosen option

Section 3: Types of Economies There are 4 types of economic systems In a market economy, the 3 basic questions of economics are answered based on the concepts of supply and demand Capitalism is another name for this system The US economy is known as a Capitalism, private citizens own and use the factors of production in order to seek a profit Free Enterprise is another term used to describe the American economy

- Competition is allowed to flourish with little or no government interference - Laissez- faire- little or no government interference - In this economy PRIVATE CITIZENS NOT THE GOVERNMENT OWN THE 4 FACTORS OF PRODUCTION - The profit motive drives the decisions of this type of economy - Citizens are considered to have consumer sovereignty - They determine what products are to be made, based on the products that they demand

There are NONE! - There are NO pure market economies in the world today - Countries that do have some form of a market economy have the largest per capita GDP, which can compare one nation’s economy with another (the total GDP- the total dollar value of all final goods and services produced within the country in a year- divided by the population)

Command Economy - The opposite of the market system is the command economy (communism) - In a pure command economy, the individual has little, if any, influence over answering the basic questions of economics - Under this system these major decisions are made by the government - They tell producers WHAT TO PRODUCE, HOW TO PRODUCE IT, AND FOR WHOM it is to be produced for

- Karl Marx came up with the idea of socialism The factors of production should be owned by society, through the government - He interpreted human history as a clash between the workers and the capitalists - In pure communism, the workers will eventually own all the factors of the government - No pure communist government exists today

Mixed Economy - The US and every other capitalist society today has a mixed economy - In this economy, elements of market and command economies exist - Private ownership of property and individual decision making are combined with government regulations and social welfare programs - The government also plays a role with externalities

Changes… - Many countries today are trying to change from command economies to mixed or market economies, like Russia and China Other countries called developing countries are doing the same - They have usually have traditional economies- where the questions of economics are answered based on customs or traditions - These customs are passed down from generation to generation - Most of these nations are small, and there are few of them in the world today