HOW PEOPLE USE LIMITED RESOURCES TO SATISFY UNLIMITED WANTS ECONOMICS SHOW ME THE MONEY! Culturally - How do people survive, or earn a living? DEFINITION: HOW PEOPLE USE LIMITED RESOURCES TO SATISFY UNLIMITED WANTS

SCARCITY -the basic concept WHAT DOES LIMITED MEAN? scarce – “not plentiful, rarely seen”? A resource that has a finite supply and provides a valuable use A resource with alternative or competing valuable uses

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3 BASIC ECONOMIC QUESTIONS

1. WHAT GOODS AND SERVICES ARE PRODUCED? ANSWERS “consumption” What resources are available (Supply) social cost What technology is available (Supply) social cost What do people want* (Demand) social benefit What they see and know DEFINITIONS Goods – products or commodities, Physical or tangible Services – actions or activities Provided, Cannot be resold

2. How should they be produced and in what quantity? Answers “Production” Determined by the “economic system” Limited by the factors of production Land: natural resources Labor: human input – sweat and/or brains Capital: resources (tools) made or used by humans Entrepreneurship: individual willingness to take risk; to invent, to innovate, to organize

3. FOR WHOM SHALL THEY BE PRODUCED? Answers: “Distribution” Who gets what, and how much and how do they get it? (how is it allocated) Social/Political Organization

Traditional Economy Closely tied to the environment Choices and Social roles determined by Custom Belief system Status Birth Family Gender

BASIC ECONOMIC REASONING 1. People make choices 2. The choices people make have costs 3. People respond to incentives in predictable ways 4. People create economic systems that influence individual choices and incentives 5. People gain when they trade voluntarily 6. People’s choices have consequences that lie in the future

1. People make choices People face tradeoffs economize People choose the alternative that seems best to them, because it involves the least cost and the greatest benefit People economize by selecting the best combination of costs and benefits

2. The choices people make have costs Opportunity cost The cost of something is what you give up to get it Alternative forgone Cost is the second best choice people give up when they make their best choice

3. People respond to incentives Incentives are actions or rewards that encourage people to act. When incentives change, peoples behavior changes in predictable ways Rational decision-making

4. People create economic systems that influence individual choices and incentives How people cooperate is governed by written and unwritten rules. As rules change, incentives change and behavior changes Traditional Closely tied to the environment Choices and Social roles determined by Custom, belief system, birth, family gender Market Markets are usually a good [most efficient] way to organize economic activity Command / Planned : addresses Income inequality, redistribution of wealth requires government control Mixed Governments can sometimes improve market outcomes

5. People gain when they trade voluntarily Trade can make everyone better off Voluntary trade creates wealth People can produce more in less time by concentrating on what they do best. The surplus goods or services they produce can be traded to obtain other valuable goods or services

6. People’s choices have consequences that lie in the future Choices are made on the anticipated benefit compared to present circumstances The important costs and benefits in economic decision making are those which will appear in the future. Economics stresses making decisions about the future because it is only the future that we can influence. We cannot influence things that have happened in the past.