Economics: The Basics

The Basics.. Fundamental problem facing all societies: SCARCITY Define: The condition that results from society not having enough resources to produce all the things people would like to have

Economics is.. The study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources Need: basic requirement for survival Want: a way of expressing a basic need

3 Basic Questions of Econ 1.What to produce? Consumer vs. Defense Production 2.How to produce? Less equipment, more workers? 3.For whom to produce? Products must be allocated to someone

Factors of Production Define: resources required to produce the things a society would like to have Land: resources not human made Capital: tools, machinery, equipment necessary to produce a good

Factors of Production

Labor: people with all their efforts, abilities, and skills Entrepreneurs: a risk taker in search of profits who does something new with existing resources

Making Decisions Trade Offs: An alternative that we sacrifice when we make a decision “Guns or butter”: A phrase that refers to the trade-offs that nations face when choosing whether to produce more of less military or consumer goods

Guns (defense spending) or Butter (consumer spending)

Opportunity Cost Opportunity Cost: the most desirable alternative given up as a result of a decision

OR….

Or…

Broad Social Goals Economic Efficiency: refers to how well scarce productive resources are allocated to produce the goods and services people want and how well inputs are used to keep costs low Economic Equity: “Fairness”; Distribution of income and wealth; Equal opportunity and outcomes; What people think is right and wrong

Broad Social Goals Cont. Economic Freedom: freedom to decide to spend or save; freedom to choose jobs; start business Economic Growth: Increasing production of goods and services over time Economic Security: Protecting consumers, producers, and resource owners from risks that exist in society

Broad Social Goals (end) Economic Stability: Maintaining stable prices and full employment; Keep economic growth smooth and steady

The broad social goals are reflected in.. Command Economies: aka a planned economy; government controlled Market Economics: naturally fluctuating economy with no government intervention Mixed Economies: having aspects of both command and market economies

3 Types of Economies Traditional: basic economic decisions are made according to long- established patterns of behavior that are unlikely to change Command Economies: government or central authority owns or controls the factors of production and makes the basic economic decisions Planned Economies Market economies: a system in which private individuals own the factors of production and are free to make their own choices about production, distribution and consumption

Mixed Economy A mixture of the three basic economic systems China: Command Economy but in 80’s and 90’s began instituting more aspects of private business US: Market Economy aka a Free Enterprise System; Elements of government control in our economy