Unit 1: Introduction to Economics

Economics All people and societies have unlimited wants. They desire goods and services: Goods: tangible items (food, clothing, electronics) Services: not physical, not tangible, tasks that one person performs for another in return for payment (movies, concerts, cleaning services, electricity) Productive Resources: Factors of production, used to produce goods and services, limited Four types: 1. Human Resources: Labor 2. Natural Resources: ‘gifts of nature’ - renewable resources: can be drawn on indefinitely (timber, air) - exhaustible: does not renew itself, limited amount (oil, minerals) 3. Capital Resources: money and human creations used to produce goods and services (factories, trucks, machines) 4. Entrepreneurship: person who risks capital to start a business

Economics Scarcity: The condition facing all societies because there are not enough productive resources to satisfy people’s unlimited wants Economics: 1. examines how individuals, businesses, and governments use their scarce resources to fulfill their unlimited wants 2. organizes, analyzes, and interprets data about those economic behaviors 3. develops theories and economic laws to explain how the economy works and predict what might happen in the future Microeconomics: Focuses on individual economic behavior Macroeconomics: Focuses on the economy as a whole (either national or international)

In celebration of your upcoming High School Graduation, your family has agreed to throw you a graduation party. You have been granted access to unlimited resources for this party. Today, you will come up with an idea for the party. You should include a theme and a brief description of what the party will include. Be as creative as you like… remember, you have unlimited resources!!!

THOROUGHLY ANSWER THE FOLLOWING QUESTIONS ON LOOSE-LEAF AND ATTACH THE RESPONSES TO THE THREE BUDGETS. PLEASE BE THOUGHTFUL. What did you sacrifice (change or lose) as the resources (money) for the party decreased? 2. How did you decide what to sacrifice? 3. What did you have to do to keep the theme the same?

THOROUGHLY ANSWER THE FOLLOWING QUESTIONS ON LOOSE-LEAF AND ATTACH THE RESPONSES TO THE THREE BUDGETS. What did you sacrifice (change or lose) as the resources (money) for the party decreased? 2. How did you decide what to sacrifice? 3. What did you have to do to keep the theme the same?

Economic Systems Three Economic Questions: Scarcity forces producers and whole societies to address the three basic economics questions: 1. What goods and services will be produced? 2. How will they be produced? 3. For whom will they be produced? The answers to these questions and who gets to answer the questions vary depending on the type of economic system a country has. Economic Systems: 1. Traditional Economy 2. Transitional/Developing Economy *** 3. Pure Market Economy 4. Pure Centrally Planned Economy (Command) *** 5. Mixed Market Economy ***

Traditional Economic Systems Traditional Economy: Economy shaped by custom or religion (caste system) All three questions answered by customs handed down from generation to generation Family is the most important economic unit, in order to survive the good of the group must take precedence over the individual Problems with a traditional economy: No choices for consumers no opportunity for advancement for labor, no incentive to succeed, less productive does not use technological advancements Transitional/Developing Economy: Any economy that is shifting from one system to another Most traditional economies are changing because of technology – switching to a mixed market economy – developing world Economies are becoming more modernized – more technology

Pure Market Economy Private Ownership of all resources, goods, and services Free, Competitive Markets (Free Enterprise System) No Government regulation and taxation (laissez faire capitalism) Revenues go exclusively to the resource owners The relationship between consumers and producers in the markets answer all three questions Adam Smith’s Invisible Hand – each individual pursues his or her self-interest but the invisible hand of market competition promotes the general welfare Problems with a Pure Market Economy: - Difficulty enforcing property rights - No protection for those in poverty or the elderly or disabled, no regulations protecting labor - Nothing to prevent monopolies from forming - No public goods or protections- Military, Police, Environment

Pure Centrally Planned Economy (Command) Public ownerships of all resources (including labor), goods, and services Central Planners allocate resources and direct the production and distribution of goods and services No Competition in the economy Government answers all three questions (Socialism and Communism) Karl Marx Problems with a Pure Centrally Planned Economy: - Consumers get low priority – consumer goods are scarce - little freedom of choice for individuals, government decides what is important, shortages - no incentive for individuals to succeed (no entrepreneurs)

Mixed Market Economy A combination of market and command economies Government control, not command – regulates the market to ensure the welfare of all How much role the government has depends on the country Monopolies are regulated and illegal actions are punished Freedom of choice for consumers Incentive for labor to advance and work hard Invisible hand of the market continues to promote the common good - Market answers three questions The most common economic system in the world, the United States has a mixed market economy

Developing Command Mixed Market

The United States Mixed Market System Market: The means by which people buy and sell something, an arrangement that allows buyers and sellers to exchange things Product Markets: Where goods and services are exchanged Resource (Factor) Markets: Where productive resources are exchanged Market Participants: Households, Firms, and Governments – All act as both producers and consumers Circular Flow of Money: The flow of resources, products, revenues, and incomes among market participants

Government in the United States Market System Governments in the United States strives to maintain a free enterprise economy while simultaneously providing protections, provisions and regulations to ensure the public welfare. They also act as producers and consumers. Role of Governments in the United States: Provide Public Goods: Military, Police, Public Schools, Transportation (Create Jobs, Purchase goods and services) Regulates Business Practices: No Monopolies, Truth in Financial Reports and Advertising, Protects innovation (patents) Protects Consumers and Laborers: Food and Consumer product safety, minimum wage, working hours, safety and health at work Provides Safety Net: Welfare, Social Security Promotes Healthy Economy: Uses several methods to prevent recessions and depressions, promotes strong economic growth (increasing GDP), Strives to keep unemployment low Imposes and Collects Taxes

Consumers in the United States Market System In order to pursue their rational self-interest, consumers should consider: Cost-Benefit Analysis: approach that weighs the benefits of an action against its costs; either try to maximize the expected benefit with a given cost or minimize the expected cost of achieving a certain benefit Marginal Analysis: adding one more product or item, Marginal Cost v. Marginal Benefit Economize: making decisions according to the best combination of costs and benefits Trade-Offs: The alternates that consumers give up when they make choices Opportunity Costs: Value of the next best alternative you must give up (opportunity lost)

Producers in the United States Market System All participants act as producers, supply productive resources, supply goods and services Producers try to maximize profits Profit = Total Revenue – Total Costs Total Cost = Fixed Costs + Variable Costs - Fixed Cost = Costs that don’t change regardless of output - Variable Costs = Cost that increase with production Comparative Advantage: Being able to produce something using fewer resources than other producers require Adam Smith’s Invisible Hand – each individual pursues his or her self-interest (consumers and producers) but the invisible hand of market competition promotes the general welfare

Consumers in the United States Market System - All participants act as consumers, demand goods and services Consumer Sovereignty: consumers have the ultimate control over what is produced because they are free to buy what they want and reject what they don’t want Consumers focus on Maximizing their Utility (their level of satisfaction or sense of well-being) No Such Thing as a Free Lunch : Every choice consumers make have costs involved (Costs = money, time, level of satisfaction) Unlimited Wants v. Reality – Choices (Services vs. Goods, Quality - Basic, Luxury, and Inferior Goods, Quantity) Rational Self-Interest: each individual tries to make the best choices for themselves