Transcript What is Economics?

What is Economics?
How Economic Systems Work
Economic Resources
Capitalism and Free Enterprise
Economics I
The Fundamental Problem
 We do not have enough
resources to satisfy our
wants and needsSCARCITY
 Economics is the study
of how we make
decisions in a world
where resources are
limited
 Scarcity forces us to
make decisions and
choose alternatives
Economics I
Three Questions
 WHAT to Produce- make choices between
wants and needs
 HOW to Produce- oil drilling in Alaska,
factories and pollution
 FOR WHOM to Produce- who gets what?
Economics I
Making Economic Decisions
 Weigh the costs and benefits of an action
 Think of the trade-offs: buy a CD, get music, but lose
money- is it worth it?
 Think of the opportunity costs: cost of the next best
use of your time if you go to college for 4 years, that
will cost you 4 years of full time work
 When considering the cost of a decision, think of fixed
and variable costs
 Sometimes there are extra costs not considered when
the decisions was first made- Marginal Costs cost of
producing one more unit of something
 Marginal Revenue: Extra revenue made from selling
one more unit of output
 Marginal Benefit: Extra benefit associated with an
action
Economics I
Cost-Benefit Analysis
 Compare marginal cost and marginal
benefit
Economics I
Becoming an Economically Smart Citizen
 Understand how American economy works
Market Economy
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System of Supply and Demand
Based on capitalism- private citizens own means of
production
Based on free enterprise- businesses compete with
little gov’t interaction
Understand Incentives- rewards that influence
behavior
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Price/Bonuses
Economics II
Economic Resources
 American output is measured in goods (what we
consume) and services (what we do for others)
4 Factors of Production- resources necessary to produce
goods and services
1. Natural Resources
2. Labor- nation’s labor force (human resources)
3. Capital- money, tools, machinery to produce other
products
4. Entrepreneurs- People who start businesses, invent
new products
Economics II
Gross Domestic Product
 People measure economic success by their
incomes
 The nation measures economic success by
measuring how much (in dollars) all goods and
services cost in a year Gross Domestic
Product (GDP)
 GDP: Number of goods X Price of the good =
Value
 Higher GDP is goodStandard of Living
(quality of life)
Economics II
Economic Activity and Productivity
 There is a circular flow in a market (goods/services
change hands)
1. The Consumer- workers earn wages in exchange for
labor
2. Business Sector- an person spends their income in
the business sectorreceive payment in exchange for
product
3. The Government Sector- Government acts much
like a business
4. The Foreign Sector- US buys and sells products
from all nations
Economics II
Productivity and Economic Growth
 Economic growth occurs when total output of goods
grows over time
 There are several factors that help boost economic
growth
1. Productivity When resources are used
efficiently
2. Specialization When certain markets focus on
producing goods/services they can make better than
anyone else
3. Division of Labor Breaking down a job into
smaller separate parts
4. Human Capital investing time and effort into
making your employees happy
5. Economic Interdependence Willingly rely on
others for help
Economics III
Capitalism and Free Enterprise
 US Economy based on private ownership of business
Capitalism
 Free Enterprise when competition is encouraged and
allowed to go on without gov’t interference
Economics III
Features of Capitalism
1. Markets- places where the products and money are
exchanged
*Factor Markets: where money is exchanged for labor
*Product Markets: where goods/services are
purchased
2. Economic Freedom- ability to make our own economic
choices
3. Private Property Rights- ability to own/dispose our
own property
4. Competition- struggle between buyers/sellers keeps
prices low
5. The Profit Motive- Ppl. want profit (money left over)
and are willing to risk savings for more money
6. Voluntary Exchange- when both the seller and buyer
benefit from a transaction
Economics III
Spread of Capitalism
 No one invented capitalism- grew over time
 Two concepts
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Idea that people could work for economic gain
Idea that government should have a limited role in the
economy
Adam Smith- The Wealth of Nations
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Scottish economist
Scientifically described the basic principles of
economics
Laissez- Faire Economics- gov’t should not interfere
with economy