1. Economics CHAPTER 1 AND 2

2. What is Economics?  What is economics? Social science of decision-making.  “Economy is the art making the most out of life.” Gary Becker

3. Scarcity 1. Limited Supply AND 2. Desirable  More important b/c nearly everything is limited at any particular moment in time. 3. OR more than one valuable use. Is it scarce? Handout

4. Opportunity Cost  The value of the next best alternative you give up when you make a decision.  Only the next best choice

5. TINSTAAFL  There is no such thing as a free lunch.  Opportunity COSTS  Joe’s  Arnie’s  Society’s

6. Factors of Production (Resources) A.K.A.—factors of production Makes all g/s Land—natural resources Labor—paid human effort Capital—g/s used to make other resources Physical Human Entrepreneurship Risk taker Combine other factors

7. Micro vs. Macro Microeconomics—study of how individuals, businesses, or markets make decisions Macroeconomics—studies how economic activity in the aggregate—all the businesses or all the consumers

8. Production Possibilities Curve  Demonstrates tradeoffs and opportunity cost of producing two items  Also demonstrates marginal thinking

9. Constant Opportunity Cost Constant opportunity cost—opportunity costs stay the same for the entire curve. For each and every square, it costs two triangles. Why? Resources are easily convertible

10. Increasing Opportunity Cost Increasing Opportunity Cost— As the production of one good increases, the costs of producing the other good gets higher and higher. Why? Resources are not as easily converted.

11. What different places mean. W is currently unattainable, to get to W you must shift the curve by acquiring new resources Points inside the curve show inefficiency and/or unemployment Points on the curve A-E are productively efficient—make the most g/s possible with resources.

12. Production Possibility Shifts  Shifts outward if more resources or improved technology  Shifts inward if resources are lost  More physical capital goods=more of a shift outward

13. Economic Systems  An organized way to produce and distribute goods and services.  Market, Command, Traditional, Mixed

14. 3 Economic Questions every economic system must answer  What will be produced? How will it be produced? Who gets the g/s?

15. Traditional Economy  3 Q’s answered by habit, custom, tradition  Little freedom  Ex. Intuits, Aboriginals, Native Americans, African tribes  Advantages—little uncertainty, Social Capital  Disadvantages—discourage new ideas, economic stagnation

16. Command Economy  Govt. answers the 3 questions  A.k.a—central planning  Price system vs. rationing  No private property  Ex. Former Soviet Union, Cuba, N.Korea

17. Command Economy Advantages  Less uncertainty—Job security  Change direction quickly—ex. ag to industry, race to space Disadvantages  Little growth  Little freedom  Perverse Incentives  Power is centralized with the government, needs a large bureaucracy  Little Flexibility

18. Market Economy  Aka capitalism  People make the decisions  Characteristics  Private Ownership--capitalism  Consumer Sovereignty  Examples  GB, Canada, U.S., Singapore, S.Korea, Japan

19. Adam Smith  The Wealth of Nations  Father of Economics  Self-Interest Motivates  Competition Regulates

20. Market Economy Advantages  Freedom  Gradual Adjustments  Decentralized Decision Making  Variety of G/S  Provides Incentives for Hard Work  Provides Incentives to Conserve Resources Disadvantages  Rewards only productive resources  i.e. not everyone is provided for  Uncertainty—boom and bust cycle  Market Failures  Lack of Competition  Lack of Information  Externalities—3rd party is harmed/helped by someone else’s actions.  Positive—produces benefits to society that cost someone money  Negative—produces a detriment to society that saved someone money  Providing Public Goods—market will not provide these  Non-excludability—cannot exclude someone  Non-rivalry—one person’s consumption does not limit other people’s consumption  Examples  Free Rider Problem

21. Mixed Economic Systems  All economies are this!!!  Depends on the degree of government intervention  Socialism—  gov. owns some basic resources. ex. 90% of oil is owned by countries—Saudi Arabia, Venezuela, and Russia; gov.  PROVIDES basic essentials like housing and healthcare—the healthcare bill is NOT government run healthcare  http://www.heritage.org/index/ranking.aspx

22. AMERICA—Market Based economy with government intervention  Free Enterprise  Market Characteristics  Economic Freedom  Voluntary Exchange  Private Property  Profit Motive  Competition

23. AMERICA--Government  Protector  Consumer Product Safety Commission, FDA, USDA, OSHA  Protects private property—home and intellectual property  Provider  Public Goods, Safety Net—Social Security, Medicare, Medicaid, Unemployment, Food Stamps  Regulator  bustin’ trusts: Sherman Anti-Trust Act (1890), Federal Trade Commission Act (1914)  Public disclosure laws  Corrector  Corrects negative externalities by taxing or outlawing—pollution  Promotes positive externalities by subsidizing—education