Economics “The Basics of Economics”

Part I: The Basic Terms of Economics

People in Economics ► In any society, there are two major players in economics  Producer – maker and/or seller of goods and services  Consumer – buyer and/or user of goods and services (everyone is a consumer)

Needs vs. Wants ► Needs – something humans require for survival (food, water, clothing, shelter) ► Wants – something desired, beyond what is required for survival (IPOD, cell phone)

Goods vs. Services ► Good – any manufactured product  Ex. food, shoes, or TVs ► Service – work done for others  Ex. police, restaurants, doctors, beauticians, teachers

Scarcity ► A shortage of goods or services  In any society, there is never enough of everything to satisfy everyone’s wants and needs  Unlimited wants and limited resources force choices.  Individuals, businesses, and governments all make choices due to scarcity.

Scarcity in Developed Nations ► Insufficient domestic petroleum ► Lack of raw materials ► Unfavorable balance of trade (more imports than exports)

Scarcity in Underdeveloped Nations ► Not enough farmland, water, and food ► Lack of medical personnel, supplies, and facilities ► Lack of transportation for goods ► Lack of building materials ► Lack of employment ► Lack of capital for investment ► Lack of education

Allocation of Resources ► Deciding who gets what resource because people’s wants exceed the available resource resulting in scarcity ► Opportunity Cost – something that is given something that is given up when something else up when something else is chosen is chosen

Economic Decisions ► Producers in an economy must make the basic economic decisions:  What to produce?  How to produce?  For whom to produce?

Law of Supply and Demand ► Supply – the amount of good or service available for sale in a market ► Demand – the amount of a good or service wanted in a market ► When supply is up, and demand is down, prices go down. ► When supply is down and demand is up, and demand is up, prices go up. prices go up.

Part II Resources: The Factors of Production

Productive Resources ► The availability of these impact the economic decisions ► Four major categories:  Natural  Human  Capital (Goods and Human)  Entrepreneurship

Natural Resources ► Would include the sun, wind, water, oceans, rivers, gifts of nature, and mineral resources available in an area

Human Resources ► “Labor”  People with talent, knowledge, and skills

Capital “Goods” ► These are the “Tools”  Things that have been produced by peoples past efforts that are used in production of goods and services  Examples: Tools, equipment, buildings, machinery, factories ► This is not Money!  Money is NOT a resource – Money is a means or medium of exchange  Money is not worth anything by itself, its value is what we can exchange the money for.

Human Capital Human Capital ► Investing in Human Capital involves training & education ► When you improve people skills they will be more productive ► People with more education will earn more ► Teachers are investing in “Human Capital”

Entrepreneurship ► The ability and willingness to see an opportunity to make a profit by making and selling a good or service; the willing- ness to risk capital ► Entrepreneur – person who risks capital to produce a good or service ► Investor – person who provides capital to an entrepreneur ► Middleman – a trader who buys goods from the producer and, in turn, sells the goods to another seller or sells directly to the consumer for profit (involves mark up in price to consumer at each exchange)

Opportunity Recognition ► Entrepreneurs must recognize an unmet demand in the economy and try to meet it ► This involves Risk Taking  China – people grow rice in flooded fields, which they fish to sell  Truett Cathy - Chick-fil-a

Technology ► Advancements in technology have led to higher productivity and a higher standard of living.

Examples of Technology ► The wheel ► Irrigation ► Hydroelectric power ► Automobiles ► Telephones ► Computers

Economics

Part III: Economic Systems

► Economic systems are the ways by which societies make economic decisions  What to produce?  How to produce?  For whom to produce? ► There are four types of economic systems  Traditional, Market, Command, & Mixed

Traditional ► Depends on History, Traditions, Custom ► Economic decisions repeat those made in earlier times  Decisions are made the way they always have been  Customs are passed on from one generation to the other  Land is commonly owned ► Barter – to trade one good or service for another ► Examples:  Villages of India (remote areas)  Remote African Tribes

Command ► Economic decisions are made by the government ► Economic decisions:  What to produce?  How to produce?  For whom to produce? ► Examples:  Cuba & North Korea  Former Soviet Union  China (was command now has a mixed system)

Market ► Economic Decisions are made by individuals ► Consumers decide what is produced by what they purchase ► Producers determine how to produce goods and services  They want the most economical way (have to compete with other producers) & ONLY the most efficient will stay in business ► Income – depends upon the productive resources that a person has to sell ► Prices – market prices are signals that affect production and consumption

Mixed ► Blend of command and market systems ► Most systems are a mixture of systems (not all of one or the other) ► Producers determine production but the government sets safety standards for products  United States – OSHA, FDA, Safety Laws that regulate trade ► Free enterprise – found with market/mixed economies

Free Trade ► Free Trade – trade without barriers or conditions ► Lack of government rules or restrictions ► In the past, countries used tariffs and barriers to try and protect their own goods  European Union (NO Quotas, Trade Barriers, or Restrictions)  NAFTA (North American Free Trade Agreement)  ASEAN (Southeastern Asian Nations) – Trying to overcome barriers by trading in blocks  SADC – Southern African Development Community  ECOWAS – Economic Community of West African States

Imports and Exports ► Tariffs: Tariffs, taxes on imports, raise the price of imported goods, which increases the demand and price for the same goods produced by domestic suppliers Revenues from tariffs are collected by the domestic government

Tariff Example ► A farmer can produce corn and sells it domestically (not exported) ► An imported corn can be purchased from another country for less (cheaper) than the domestic farmer ► The domestic farmer will have to lower his price on corn to compete with the imported corn- unless there is a tariff added to the imported corn

Trade Quantity Limits ► Quotas put a legal limit on the amount that can be imported, creating shortages (scarcity) which cause prices to rise ► A quota benefits domestic producers in the same way a tariff does, but the additional money expended on foreign goods goes to the foreign producers, not the domestic government

No Trade ► Embargoes prohibit trade with other nations ► They bar a foreign nation's imports or ban exports to that nation or both- it is not allowed ► The United States has a trade embargo with Cuba due to political policies