Basics of Economics

Scarcity and Choice Primary idea: We can’t have everything we need and want!

Needs vs Wants Needs: necessary for survival Air, food, shelter Wants: item we desire but do not NEED to survive If we cannot have everything, how do we make decisions???

Choose Wisely Economics is the study of how people seek to satisfy their needs and wants by making choices. Why, oh why, must we make these difficult choices, you ask??...

Scarcity! ...because of the idea economists call scarcity Scarcity means that we have limited quantities of resources to meet our unlimited wants. Economics is about solving the problem of scarcity.

Goods and Services Goods – physical objects Shoes and shirts Services – actions or activities that one person performs for another Haircuts, dental checkups, tutoring Although these goods and services are abundant in the U.S., they are still scarce because there is always a limit.

Scarcity Versus Shortages Scarcity ≠ Shortage Shortage – when producers will not or cannot offer goods or services at the current prices (more on this later) Temporary or long term Scarcity – always exists b/c our needs and wants are always greater than our resources

Factors of Production The resources that are used to make all goods and services are factors of production. There are 3. They are land, labor, and capital.

Land Land – all natural resources (found in nature) used to produce goods and services Fertile land for farming Products in or on the land Coal, water, forests

Labor Labor – the effort that a person devotes to a task for which that person is paid Medical aid provided by a doctor Tightening of a clamp by an assembly line worker Artist’s creation of a painting Repair of a television

Capital Capital – any human-made resource used to produce other goods and services There are two kinds: Physical and Human

Capital Physical Capital Human made objects used to create other goods and services Buildings and tools Benefits of physical capital: Extra time More knowledge More productivity

Capital Human Capital Knowledge and skills a worker gains through education and experience

Who pulls these resources together? Entrepreneurs – ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services Take risks to develop original ideas, start businesses, create new industries, and fuel economic growth

Scarce Resources No matter what good or service, the supplies of land, labor, and capital used to produce it are scarce.

Opportunity Cost

Trade-Offs Trade-offs – all the alternatives we give up whenever we choose one course of action over another All individuals, businesses, and groups of people make decisions involving trade-offs.

Trade-Offs: Who makes them? Individuals Businesses How to use land, labor, and capital resources Society Guns or butter?

Opportunity Cost Opportunity cost – the most desirable alternative given up as the result of a decision What we trade for what we choose Decision-making grids – weighing two alternatives What alternative offers the most desirable benefits?

Thinking at the Margin Economists always think “at the margin” when deciding how much more or less to do It involves thinking about using ONE additional unit Look at the opportunity costs and benefits of each additional unit

Historical Example U.S. faced urgent task when entering W.W. II… How could we create the weapons and equipment needed to defeat Hitler? (We didn’t just have all that stuff sitting around!)

Now that you know some economic concepts… …you probably realize that we can’t just suddenly make a bunch of military stuff without giving up something! (ahhemm…trade- offs)

To create what we needed… …we had to switch our production focus as a country from consumer goods (like food and clothing) to wartime goods (like guns, aircraft, and uniforms)

The classic example is “Guns v. Butter” What the heck does that mean? It’s supposed to show that every society has to choose what to produce. Guns represent military expenditures. Butter represents money spent on domestic (consumer) things.

Economic Systems Economic System: way in which a nation uses its resources to satisfy its people’s wants and needs Three Basic Questions all nations have to answer (businesses too) What goods and services should be produced? How should they be produced? Who will get the goods and how will they be distributed?

Types of Economic Systems Traditional economy: based on habit, necessity, customs and religious tradition - passed down for generations Children take on the profession of their parents Almost alway agrarian Command economy (also called directed): government leaders answer the three basic questions Individuals have little economic freedom Few consumer goods are available Controlled by a strong central government (communism)

Market/Capital economy: individuals make the decisions Market: voluntary exchange of goods and services between buyers and sellers

Income Payments $ (Wages, Rent, Interest, Profit) $ (1) Circular flow of economic activity: income flows continuously between business and consumers Productive Resources (Labor, Land, Capital, Management) (2) Consumers Businesses Goods and Services (3) $ Consumer Expenditures $ (4)

Mixed economy: combination of three pure economic systems-all economies are really mixed

Section 2-2: Characteristics of the American Economy Limited Role of Government Capitalism: economic system in which private individuals own the factors of production Pure capitalism can be referred to as a laissez-faire system Laissez-faire: a system where government limits its interference with the economy (means to let alone)

Laissez-faire: Government should leave the economy alone No regulations No protection for workers No control of prices No control of wages The guide for the economy is self-interest (one might call it greed). Self-interest will ultimately make it better for everyone. The economy will be guided by an Invisible Hand (market forces).

Protect the citizens from foreign invasion. Role of Government Protect the citizens from foreign invasion. Protect the citizens from internal enemies. Help build infrastructure (roads, canals, bridges).

Law of Supply and Demand Supply: the amount of items at a given price available for sell. Demand: the number of items at a given price that consumers wish to purchase. Law of Supply & Demand: If the demand for an item grows beyond its supply, more producers will enter that market to increase the supply until the market achieves equilibrium. If the demand for a specific item lessens, producers will leave the market and put their resources into more profitable items.

Law of Competition Competition is good. Competition keeps prices low. If you cannot produce an item that is competitive in the market, you will go out of business. If you go out of business your resources will be put to use in a more productive way and you will find another place in market.

What is the down side of Free Enterprise Capitalism? The individual is on his own; every man for himself. If you do not have marketable skills or control of needed resources, you may easily get left behind and never be able to live beyond subsistence in this economic system.

Freedom of Enterprise Individuals can own and control the factors of production No guarantee of success Governments place restrictions on some things ( child labor laws, special licensing, zoning laws, etc.)