1. UNIT 1: Fundamental Economics
Basic economic concepts, choices, rational decision making, investment in education/training, etc 1

2. Scarcity
SCARCITY: a condition that exists when UNLIMITED needs/wants exceed the LIMITED available resources
The central problem in economics, all things revolve around scarcity
Must be a want/need for the item and a limited amount
There are DEGREES of scarcity
If there is a lot of something that no one wants, it is less scarce than something MANY people want

3. Scarcity Example Is it limited? Is it desirable? Is it scarce? Time
Water
Garbage
Air We Breath

4. Factors of Production (Productive Resources)

5. Productive Resources (FOPs)
Productive Resources- scarce items used in the production of goods and services in an economy.
There are four types of productive resources (aka Factors of Production)
Natural Resources (land)
Human Resources (labor and human capital)
Physical Capital
Entrepreneurship

6. 4 Categories of Productive Resources (Factors of Production)
Natural Resources
Land
Items from nature that we use to produce goods and services
Example: tree is a natural resource used to produce goods like lumber and paper
Human Resources
Labor
People involved in the production of goods and services
Human Capital – abilities someone brings to the production process

7. 4 Categories of Productive Resources (Factors of Production)
3. Physical Capital
Tools, machines, and structures used over and over again in the production of goods and services
NOT MONEY!
Example: a mower for a lawn company
4. Entrepreneurship
Brings resources together in an innovative way to produce a product
Takes all the risk
Think SHARK TANK!
Example: Steve Jobs

8. Factors of Production
Write down everything you can think of that would be needed to make a pencil like this.

9. What went into this? Rubber (from Malaysia) machines metal
Someone who put all of this together.
wood
graphite

10. What motivates an entrepreneur?
Entrepreneur’s take all the risk when starting a business
They believe the potential rewards of success outweigh the cost of the risk
What motivates them?
Profit motive
Provide jobs
Innovation
Improve society

11. What motivates an entrepreneur?
Profit Motive
#1 motivating factor
Believe the revenue they receive will be greater than the costs
Provide Jobs
2015 accounted for 20% of all net new job creation
Innovation
Typically work as an employee in the industry before going out on their own
Often see ways companies could improve efficiency or production
Improve society

12. Opportunity Costs

13. Opportunity Costs
The study of economics is all about the choices made by individuals, businesses, and governments
ALL choices involve both benefits and costs
Every choice has an opportunity cost and trade-offs

14. Opportunity Costs
Opportunity Costs- values of one’s NEXT BEST alternative given up when a choice is made
Example: Sarah decides to go for a run instead of studying. Her opportunity cost is…
Trade-offs- ALL the alternatives we give up whenever a choice is made
Example: Clay chooses to go to the Braves game instead of going to a concert or going to work. What are Clay’s trade-offs?

15. Opportunity Cost Example
On Fridays, Ms. Wilkins has the option to go home and nap, go to Chickfila, or go to the gym. She chooses to go to the gym. Her next best choice is Chickfila.
What are her trade-offs?
What is her opportunity cost?

16. Opportunity Costs DVD set of a TV Show($60) New outfit ($85)
You have $100 to spend at the mall, rank the following in the order (1, 2, 3) you would purchase them.
DVD set of a TV Show($60)
New outfit ($85)
New pair of shoes ($65)

17. Marginal Benefit & Marginal Costs

18. Marginal Benefit & Marginal Costs
Economics is based on the idea that individuals make rational decisions
Rational decisions are based on comparing the marginal benefits to the marginal cost of an action
Marginal- incremental or small changes
The rational decision is one in which the marginal benefit is greater than or equal to the marginal cost of the choice

19. What is marginal benefit?
Marginal benefit- additional positive value one receives from undertaking one more unit of an action
Example: The marginal benefit of running one more mile after running the previous two miles could be the calories burned.

20. What is marginal cost?
Marginal cost- refers to the additional amount of effort, expense, or time one incurs from undertaking one more unit of an action
Example: The marginal cost of running an extra mile could be ten minutes of time you could have used to study for your Economics test.

21. Help!
A firm wants to know how many workers it should hire to maximize its profit. They hire you, the economist, to help them make this decision. Use the table on your paper to help you decide the number of workers the firm should hire.

22. Marginal Number of Unis Produced Price of Each Unit Produced
Number of Workers
Total Units produced
Marginal Number of Unis Produced
Price of Each Unit Produced
Total Revenue for Units Produced
Marginal Revenue Generated by Each additional worker
Marginal cost of hiring each additional worker
________
$2.50
$10.00 1 6
$15.00 2 11 5
$27.50
$12.50 3 15 4
$37.50 18
$45.00
$7.50 20
$50.00
$5.00 21
$52.50

23. Diminishing Marginal Utility
Diminishing Marginal Utility- with each additional unit, the experience (benefit or utility) declines
Example: After the first cookie, your enjoyment of each additional cookie decreases.

24. Incentives

25. What is an incentive?
Incentive- motivates individuals, businesses, and/or governments to undertake an action or avoid an action
Positive incentive- choose an option associated with a perceived benefit or gain
Negative incentive- does not choose a particular option because they associate with a cost that is too high
AKA: disincentives

26. Example An income tax credit for purchasing a home Positive Incentive
Individuals caught breaking traffic laws face fines or other penalties
Negative Incentive
Now you do the other two on your paper!

27. Production Possibilities Curve (PPC)

28. What is the PPC?
Production possibilities curve- economic model used by economists to illustrate all possible combinations of efficient production available to produce two goods or services
Shows the amount of one good or service sacrificed to produce additional units of the other good or service
Shows production combinations that are inefficient or impossible given the current resources

29. Efficient
Points B, C, and D indicate examples of efficient production combinations
Any point on the line is efficient

30. Inefficient Production
Point A is an example of inefficient production
Represents underutilized resources
Represents a recession
Any point inside the curve is inefficient

31. Unattainable Production
Point E is an example of an unattainable production combination
There are not enough factors of production to produce at this point

32. Opportunity Cost Movement along the curve show the opportunity cost
When moving from point B to point A, the opportunity cost is 26 text books.
The marginal benefit of moving from point B to A is 4 computers

33. Economic Growth
Curve B1 shows the economy’s original efficient production
Curve B2 shows the PPC following investment in physical capital and technology

34. Productivity
Productivity- looks at the relationship between inputs and outputs
Inputs: items that go into making a good or service.
Example: A baker needs flour and sugar that come from natural resources like wheat and sugarcane.
Output: amount of a good or service produced
Example: The baker cooks a dozen cookies.
You always want to produce the right amount of goods at the right price to make a profit

35. Increase in Productivity
Increase in productivity occurs when producers produce more output with fewer inputs

36. What is specialization?
Specialization: when individuals or businesses concentrate on a single activity or area of expertise when producing a good or service
Boost overall productivity of a business or country
Division of Labor
Example: At a fast food restaurant one employee takes drive-thru orders while another employee makes food

37. Investment
Investment: refers to the introduction of machines and equipment, building new factories, and/or purchasing and implementing new technology
Imagine if everyone invests in the new oven, this would increase the total value of good and services produced encouraging economic growth

38. Investment in Human Capital
Standards of living: material well-being people in an economy enjoy
Higher real GDP per capita the higher the standard of living
Change in standard of living requires investment in Human Capital
Higher the education level, higher the wage, and the lower the unemployment risk

39. Economic Systems

40. Economic Systems
Economic system: refers to the way a country organizes economic activity
Four economic systems are traditional, command, market, and mixed
Each economic system must answer the three basic economic questions:
What to produce?
How to produce?
For whom to produce?

41. Three Economic Questions
How societies respond to the three economic questions determine what economic system they closely relate to
Traditional: three economic questions are answered based on how things have been done in the past
Command: the questions are answered by a central authority or government
Market: the answers to the questions are determined by the interactions of buyers and sellers in the market

42. Definitions
Private ownership: ability of individuals and businesses in an economy to buy, sell and hold property as they wish without fear of government interference or seizure.
Profit: amount of revenue (price x quantity sold) received by a business minus the costs of operating the business.

43. Definitions
Consumer sovereignty: determines the goods and services an economy produces because businesses will only produce the products that consumers are willing to buy
Competition: the characteristics and behavior of firms in a particular market or industry
Government regulations: extent to which a central authority has control over the production and consumption decisions in an economy

44. Social Economic Goals
Social economic goals: values underlying the economic system a country chooses and act as a guiding force as individuals, businesses, and governments in the economy make economic choices.
Economic freedom
Economic equity
Economic security
Economic efficiency
Price stability
Full employment
Economic sustainability

45. Economic Freedom
Economic Freedom: ability of consumers, producers, and workers to make their own decisions about consumption, production, and distribution of goods and services.
More individuals and business make these decisions the more economic freedom
Market economies: have a large amount of economic freedom
Command economies: limit economic freedom in favor of an equal distribution of wealth

46. Economic Equity Economic equity: refers to fairness within the economy
There is a lot of debate over what is “fair”
Market economies: ensuring competitive markets and protecting property rights
Command economies: redistributing wealth and ensuring access to public goods

47. Economic Security
Economic security: protecting individuals and businesses from risk
Market economies: individual workers and business owners are usually responsible for themselves during the ups and downs of the economy
Command economies: government provides security through government insurance programs, guaranteed jobs, and housing/food allowance

48. Economic Growth
Economic growth: increasing production of goods and services over time
Increases in factors of production or new technological innovations
Command economies: capable of growing rapidly when using targeted sectors and guided by a central planner
Market economies: grow more slowly, but growth is more sustainable

49. Economic Efficiency
Economic efficiency: factors of production are allocated to their most productive use
Market economies: very efficient due to competition and free trade. Supply and demand allows prices to ration factors of production, goods, and services and allocate them to the most efficient uses
Command economies: less efficient because no competition since government owns all the resources, everyone has a job and no profit motive

50. Price Stability
Price stability: making sure the increases in the overall price level of goods and services in the economy is predictable and protects the purchasing power of money in the economy over time
Market economies: price levels can fluctuate with increases and decreases in the economy
Command economies: central authorities who take action against rising or falling price levels

51. Full Employment
Full employment: seeks to ensure that all those who are willing and able to work have the opportunity to do so
Market economies: can achieve full employment during a strong economy, but will suffer high levels of unemployment during economic slump
Command economies: try to ensure full employment, but will often employ resources in less efficient uses and pay lower income

52. Economic Sustainability
Economic sustainability: individual countries try to maintain an upward trend of growth in the long run
Includes food systems, environmental protection, new businesses, technological development, and health of financial system
Market economies: it is up to the firm to pursue sustainability
Command economies: government or central planner will determine the type of sustainability to pursue

53. Allocating Scarce Resources

54. Allocation Strategies
Allocation Strategies: methods available to societies as they seek to answer the question for whom to produce.
What strategies can be used?
Price
Authority
Lottery
First come, First served
Majority Rule
Personal Characteristics
Contest

55. Price
This strategy allows the forces of supply and demand to determine a market price
Supply: amount of a good, service, or factor of production a seller is willing and able to sell at each price
Demand: amount of a good, service, or factor of production that a buyer is willing and able to purchase at each price
The price where the quantity demanded is equal to the quantity supplied

56. Price The more desirable and scarce an item is the higher the price
This method is efficient because you can easily tell whether you will get the good based off your willingness to pay the high price
Example: If you want to buy a diamond necklace, you must be able to afford that diamond necklace.

57. Authority
This strategy is based on the decisions of a power person or group of people who decide who gets a good
Works for quick action because a person or a group of people in power can make and implement the decision quickly. Very efficient
Example: Elected representatives have the authority to pass legislation requiring workers to pay a tax on the income they earn

58. Lottery
This strategy gives everyone who wants the good, service, or factor of production equal odds in obtaining it
AKA random selection
Method is inefficient because it may allocate the resource to a purpose or person who does not need it or will not put it to productive use
Example: The government randomly selects individuals to receive farmland, the land may go to someone who has no knowledge of farming techniques and the land resources may be underutilized

59. First come, first served
This strategy allows people to receive a good, service, or factor of production if they get to it first or are one of the people close enough to the front of the line to receive it
Inefficient strategy since the time spent waiting in physical or virtual line takes time away from more productive activities
Example: At one time, a teenager had to wait in line to take the driver’s license road test.

60. Majority Rule
This strategy occurs when a group of people who have control over a good, service, or factor of production vote to decide how it will be distributed
If the majority is corrupt or makes a decision based on favoritism or fear then it is not going to be an efficient allocation
Example: National, state, and local governments vote to establish public parks and greenspace that could be used for commercial production

61. Personal Characteristics
This strategy allows resources to be distributed based on need or merit
The one who gets the good, service, or resource should put it to the best use
Personal characteristics can be barriers to keep certain individuals from receiving the allocation
Example: During the 1800s and early 1900s, African Americans were excluded from the right to own land based off of their skin color

62. Contest
This strategy can distribute the resource to the person who wins
The “winning” could be based on running a race (who is the fastest), in academics (valedictorian has the highest GPA), or a test of knowledge (Jeopardy)
Inefficient on a day to day basis
You would never run a race to see who gets the last slice of pizza because that would take too long!

63. Role of the Government

64. Public Goods & Services
Governments in the United States produce public goods and services only when there is a reason that the private market is unable to provide the good or service at a level considered beneficial to society
Usually paid for by tax dollars

65. Public Goods & Services
Two main characteristics of purely public goods
Shared consumption/non-rival goods
Consumption of the good by one person does not diminish the satisfaction enjoyed by another consumer who consumes the exact same good
Example: public interstate highways
Non-exclusion
Difficult or impossible to keep a person who is unwilling to pay from enjoying the benefits of the public good
Example: national defense

66. Public Goods & Services

67. Redistribute Income
When pursuing equity, governments may choose to redistribute income
Taking tax money from one group of individuals or firms and giving it to another
Include social welfare payments to low income citizens, unemployment compensation, or Social Security payments
May redistribute to higher income people such as tax credits for buying electric cars

68. Private Property Rights
In a market economy, protection of property rights is essential
Property rights are protected by intellectual property laws such as copyrights and patents, legal documents, and business licenses
The court system is available to hear property dispute and settle them

69. Market Failures
Market failures occur when the private market is unable to produce goods and services in a way that the marginal benefit to society is equal to or greater than the marginal cost to society
Include externalities and market power

70. Externalities
Externalities: occur when a third party other than the consumer or producer of a good is hurt or benefits from the production or consumption of that good
Can be positive or negative
Example: A resident gets sick because of pollution
The US government attempts to correct negative externalities like pollution through increasing taxes or regulations on the polluting industry

71. Market Power
Market power: refers to a market failure resulting from the formation of a monopoly and oligopoly market structures
Monopoly: controlled primarily by one seller of a good or service
Oligopoly: controlled by several large firms
US government traditionally breaks up monopolies and oligopolies into smaller companies
Many people believe market power is fine as long as prices are reasonable and new competitors are not barred from entering the market

72. Government Regulation
The goal of the government is to provide for the health and safety of its citizens and businesses
Some protect citizens from corporate abuse and others help businesses recover from external problems

73. Examples of Government Regulation
Increased Regulation
Sarbanes-Oxley Act of 2002 was a response to major problems with accounting practices of large public companies.
Response to Enron, Tyco, and WorldCom
Must publish financial records
Decreased Regulation
Banking Act of 1933 or Glass-Steagall included many provisions connected with the US banking system.