Transcript Unit 1 PowerPoint

Unit 1 Notes: Fundamental Economic Concepts
1. Economics - Is the study of how people try to satisfy unlimited
wants and needs through the use of scarce resources
2. TINSTAAFL – “There is no such thing as a free lunch”
- Nothing is free
- Someone must pay for free items
3. Scarcity – The fundamental problem faced by all societies
- Society may not have enough resources to produce all things
people want
4. The Factors of Production:
A. Land – gifts of nature
B. Labor – People
C. Capital – tools, equipment
- Financial Capital – money to purchase capital
5. Entrepreneur – A person who takes risks for profit
- They are often considered the 4th Factor of Production
6. Technology – Many economists add this to the factors of
production
- Technology includes any use of the land, labor, capital that
produced goods and services more efficiently
- examples – computers and robotics
7. Each society must answer 3 basic economic questions:
A. What to produce? Ex Tanks or cars?
B. How to produce? Ex Robotic or by hand
C. For whom to produce? Ex Consumers, military, or export?
8. People make bad economic decisions:
A. Failure to make a budget
B. Not saving regularly
C. Failing to distinguish between wants and needs
D. Failing to adapt your lifestyle to changed economic circumstances
9. Ethical Foundations of Economics:
A. Ethics – Consideration of right and wrong
B. Is our commercial system based on “economics” or
“greedonomics”?
C. Ex of companies like Enron or people like Martha Stewart
D. Adam Smith – Father of modern Economics
- appropriate to be self-interested but…
- moral considerations generate self-restraint
- greed is self-interest, without moral restraint
- self-interest can advance interests of society
- Sociability and Trust along with Competitive Markets and a
System of Justice – creates conditions in which self-interest
promotes the broader interests of society
10. There are several segments of Economics:
A. Description of Statistics: GDP, unemployment
B. Analysis of Statistics: Why is gasoline expensive?
C. Explanation of Economic Activity: How economies function
D. Predict Future Trends: economic forecasting
E. Economic Ethics: values and economic decisions
11. Trade-Offs: Exchanging one thing for the use of another
Ex – Time playing Xbox vs time studying
12. Opportunity Cost: Value of next best alternative
Ex – Homework or working at Wal-Mart
13. The PPF or Production Possibilities Frontier:
- illustrates opportunity cost
- Diagram (next page) shows various combinations of
goods/services an economy can produce when all productive
resources are fully employed
Guns
2
4 6 8 10
Butter 10 8 6 4 2
- Points along curve represent
maximum output
- Points inside curve represent idle
resources
- Points outside curve represent
economic growth
- Frontier – maximum combination of
goods/services that can be produced
15. Needs vs Wants:
A. Need - An item necessary for survival
Ex – food, clothing, water, shelter
B. Wants – A way of satisfying a need
Ex – need = food want = pizza
16. Markets are Locations/Mechanisms that Allow for Buying and
Selling:
A. Factor Markets – Productive resources bought and sold
B. Product Markets – Producers sell goods/services to
consumers
17. The Circular Flow Diagram – Illustrates the flow of goods/services
and money in a market system
18. Markets have Evolved into Cyberspace – buyers and sellers
interact through computers without leaving their homes
19. A Market Economy – one in which consumers and businesses
answer the what, how, and for whom to produce
Other terms – capitalism, mixed or free market economy
* Economic Systems and Decision Making:
1. Consumer Sovereignty – idea that consumers decide what will be
produced
2. Economic System – Organized way of providing for the wants and
needs of society
3. Economic Systems:
A. Traditional – Customs and beliefs guide economic decisions
- Advantages – Strong family ties, know what is expected of all
- Disadvantages – Change is discouraged; few consumer goods
Example – Nomadic herders in Mongolia
B. Command – The Government makes all decisions
- Advantages – No career choices and few consumer goods
- Disadvantages – lack of incentive to work; less inventiveness
Example – North Korea
C. Market – Economic Decisions made by people
- Advantages – individual freedom, competition, many
consumer goods
- Disadvantages – young and old excluded, prices change, slow
to change
- Example – United States
4. Social and Economic Goals of the United States are:
A. Economic Freedom – to buy and sell most products
B. Economic Efficiency – Use resources wisely, conserve
C. Economic Equity – policies benefit everyone fairly
D. Economic Security – protection against layoffs
E. Full Employment – everyone who wants a job has one
F. Price Stability – Little fluctuation, change over time
G. Economic Growth – economy over time will grow
5. Trade-Offs Among Goals: sometimes goals conflict
Ex – raising minimum wage causes prices to go up
6. Main Characteristics of a Free Enterprise (Market) Economy:
- Economic Freedom – Choose job and employer
- Private Property Rights – own and control property
- Voluntary Exchange – Buyers and sellers act freely
- Profit Motive – work to make money and not forced to work
7. Competition - Sellers compete with one another to attract
customers while lowering prices
- Consumers compete with one another to find the best
products at the lowest prices
8. Role of the Consumer – is to reject products or prices they don’t
like
9. Role of the Government –
A. Protector – of consumers ex impure drugs, etc..
B. Provider – of goods and services, a consumer
C. Regulator – of competition in market place
D. Promoter – of national goals
* Comparing Capitalism, Socialism, and Communism*
1. Pure Market Capitalism – Adam Smith said a market economy
was largely self-regulating and didn’t require government
involvement (laissez-faire)
A. based on prices, profit, private property
B. Government’s Role is limited
C. Individuals answer all economic questions
Example – United States
- Pros of Market Capitalism:
- consumer satisfaction
- Freedom to choose
- Producers supply what consumers want
- Cons of Market Capitalism:
- Ignores public goods
- produce only for those who demand
- allows for businesses to fail, have unemployment and less
productive resources
2. Pure Socialism – Arose from dissatisfaction with living and
working conditions during the Industrial Revolution
A. The State owns most factors of production
B. There is very little private property
C. Prices are set by the State
a. Democratic (market) Socialism – works in elected framework
ex – England
b. Authoritarian Socialism – central government controls
economy
ex – China
- Pros of Pure Socialism:
- people use election power
- Addresses for whom directly
- Cons of Pure Socialism:
- Government guarantee of jobs
- little labor mobility
- high taxes
3. Communism – Karl Marx’ “Communist Manifesto” (Das Kapital)
- Series of class struggles would eventually result in collective
ownership of all capital (property)
- Proletariat – workers
- Marx envisioned – Socialism as the stepping stone to
communism
- Example – North Korea
- Pros of Communism:
- all workers are equal
- no job uncertainty
- centralized control and planning
- Cons of Communism:
- no individual freedom
- no incentive to work
- little consumer satisfaction
- few day to day changes
4. Summary of Capitalism, Socialism, and Communism:
Under…….
Prices are set by…..
Factors of production are owned by……..
Economic decisions are made by…….
Capitalism
Supply and demand
Privately owned/operated
Consumers, govt, and
businesses
Socialism
Government, supply/demand
Government and the people
Government and business
Communism
Government
Government
Government and planning
committees
* 3 Theories:
- Everyone has their opinion as to how the economy should operate.
1. Classical
2. Keynesian
3. Monetarist
1. Classical:
- Key premise: Competition is best for the market.
- Competition creates better, cheaper products, more choices.
- Supply creates wealth.
- Smith’s “invisible hand”
- Encourage trade
- Oppose excessive taxation
- Stop monopolies, collusion and unions as they block
competition.
* Examples of classical theorists – Adam Smith, Ricardo,
Tea Party, Ron Paul, Conservatives, libertarians, etc..
2. Keynesian:
- Key Premise: Competitive markets are flawed and cannot stay
in balance.
- Prices go up quickly but do not fall quickly
- Full employment and production will not last
- Gov’t must repair constant recessions.
- Slow inflation with tax increases and cut government spending.
- Create demand during a recession by tax cuts and increased
government spending.
- Safety nets-social security, unemployment, minimum wage
programs
* Examples of Keynesians – Keynes, democrats, Obama, Bush, Clinton,
liberals
3. Monetarists –
- Key Premise: Non-political fine tuning is best for the economy.
- Politicians won’t raise taxes but they will cut them.
- Central banks think long run, not next election.
- Use interest rates to encourage spending or saving.
- Provide stable currencies
Key Economic Terms:
1. Consumer Goods – intended for final use by a consumer
Ex – toaster, book, etc.. (go to Wal-Mart)
2. Capital Goods – a good used to make another good
3. Durable Goods – Lasts more than 3 years
Ex – house, car, etc..
4. Non-Durable Goods – lasts less than 3 years
Ex – tires, pens, etc…
5. Services – work performed for someone else
6. Consumers – people who use goods to satisfy wants
7. Conspicuous Consumption – use of a good to impress others
Ex – Rolex watch, designer purse
8. Value – worth in dollars and cents
9. Economic Value – how much it is worth in market place
10. Wealth – sum of all products in value
11. Utility – the capacity of an item to be useful
12. Paradox of Value – items of little value (water) but necessary for
survival, have less value than a want (diamonds)
13. Specialization of Labor – workers concentrate on a task they
specialize in
14. Human capital – the sum of all skills, talents, abilities and health
of people
15. Cost/Benefit Analysis – what you gain for what you give up
16. Economic Interdependence – idea that actions of one country or
state impact what happens elsewhere