Intro To Econ
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Economics boils down to one basic thing. Choices.
We make choices because of the concept of scarcity.
We have unlimited wants but not enough resources to fulfill them all.
Economics is the study of how people, families, cities, and governments make those choices and why.
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Scarcity vs Shortage
- Scarcity is the basic condition that exists when unlimited wants exceed limited productive resources, it is permanent
- Shortage is a situation where demand is greater than the supply at a particular point of time, it is temporary.
Scarcity is the basic condition that exists when unlimited wants exceed limited productive resources, it is permanent
Shortage is a situation where demand is greater than the supply at a particular point of time and therefore is temporary. you CAN do something to solve a shortage but CAN'T stop scarcity.
Shortage is a situation where demand is greater than the supply at a particular point of time and therefore is temporary. you CAN do something to solve a shortage but CAN'T stop scarcity.
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Core Principles
- People Choose
- All Choices Involve Cost
- People Respond to Incentives in Predictable Ways
- Economic Systems Influence Individual Choices and INcentives
- Voluntary Trade Creates Wealth
- The Consequences of Choices Lie in the Future
1. People Choose
We always want more than we can get and productive resources (human, natural, capital) are always limited. The refore, because of this major economic problem of scarcity, we usually choose the alternative that provides the most benefits with the least cost.
2. All Choices Involve Cost
The opportunity cost is the next best alternative you give up when you make a choice.
When we choose one thing, we refuse something else at the same time.
3. People Respond to Incentives in Predictable Ways
Incentives are actions, awards, or rewards that determine the choices people make. Incentives can be positive or negative. When incentives change, people change their behaviors in predictable ways.
4. Economic Systems Influence Individual Choices and Incentives
People cooperate and govern their actions through both written and unwritten rules that determine methods of allocating scarce resources. These rules determine what is produced, how it is produced, and for whom it is produced. As the rules change, so do individual choices, incentives, and behavior.
5. Voluntary Trade Creates Wealth
People specialize in the production of certain goods and services because they expect to gain from it. People trade what they produce with other people when they think they can gain something from the exchange.
Some benefits of voluntary trade include higher standards of living and broader choices of goods and services.
6. The Consequences of Choices Lie in the Future
Economists believe that the cost and benefits of decision making appear in the future, since it is only the future that we can influence. Sometimes our choices can lead to unintended consequences.
We always want more than we can get and productive resources (human, natural, capital) are always limited. The refore, because of this major economic problem of scarcity, we usually choose the alternative that provides the most benefits with the least cost.
2. All Choices Involve Cost
The opportunity cost is the next best alternative you give up when you make a choice.
When we choose one thing, we refuse something else at the same time.
3. People Respond to Incentives in Predictable Ways
Incentives are actions, awards, or rewards that determine the choices people make. Incentives can be positive or negative. When incentives change, people change their behaviors in predictable ways.
4. Economic Systems Influence Individual Choices and Incentives
People cooperate and govern their actions through both written and unwritten rules that determine methods of allocating scarce resources. These rules determine what is produced, how it is produced, and for whom it is produced. As the rules change, so do individual choices, incentives, and behavior.
5. Voluntary Trade Creates Wealth
People specialize in the production of certain goods and services because they expect to gain from it. People trade what they produce with other people when they think they can gain something from the exchange.
Some benefits of voluntary trade include higher standards of living and broader choices of goods and services.
6. The Consequences of Choices Lie in the Future
Economists believe that the cost and benefits of decision making appear in the future, since it is only the future that we can influence. Sometimes our choices can lead to unintended consequences.
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Adam Smith
- Famous Economist
- Wrote "The Wealth of Nations" in 1776
- The Invisible hand
The book introduces the idea of the invisible hand in the market, he thinks free market principles are ideal and should have little government involvement, and everyone acting in his or her own "rational self-interest" improves the economy and general welfare.
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David Ricardo
- Famous Economist
- theory on wages and profit
- the labor theory of value
- the theory of comparative advantage
- the theory of rents
The labor theory of value states that the value of a good could be measured by the labor that it took to produce it. The theory states that the cost should not be based on the compensation paid for the labor, but on the total cost of production.
First economist to discuss the idea of rents, or benefits that accrue to the owners of assets solely due to their ownership rather than their contribution to any actual productive activity.
First economist to discuss the idea of rents, or benefits that accrue to the owners of assets solely due to their ownership rather than their contribution to any actual productive activity.
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Scarcity is the condition that results from society not having enough resources to produce all things people would like to have, this leads to three choices that society has to solve.
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3 main economics questions
- what to produce
- how to produce it
- for whom to produce/who gets the benefit
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Needs vs Wants
- Both are typically expressed in economic terms as two different groups, Goods and Services. These are useful, relatively scarce, and transferable to others.
Need | basic requirement for survival (food/clothing/shelter)
Want | something we would like to have, not necessary for survival
Want | something we would like to have, not necessary for survival
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Good
- There are four types of goods
- Durable, Nondurable, Consumer, and Capital
Good | useful, tangible item used to satisfy a need/want. (book, car, ipod)
Durable good – not quickly used – yields utility over time
Nondurable good – immediately consumed, lifespan 3 years or less
Consumer good – bought/used by consumer
Capital good – bought/used for production
Durable good – not quickly used – yields utility over time
Nondurable good – immediately consumed, lifespan 3 years or less
Consumer good – bought/used by consumer
Capital good – bought/used for production
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Service
- work that is performed for you
- difference between a good and service is that a good is tangible, something you can touch, while a service is not. It is something provided to you.
Service | work that is performed (haircut, doctor, oil change)
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Paradox of value
- Why do some necessities, like water, have low monetary value while non-necessities, like diamonds, have high value?
- The answer, Utility
There is a paradox of value
Why do some necessities, like water, have low monetary ($) value while non-necessities, like diamonds, have high ($$$) value?
Utility | capacity to be useful & provide satisfaction
not measurable and it varies for each person
Diamonds | scarce + utility = $$$
Water | utility, but not scarce (mostly) = $
Why do some necessities, like water, have low monetary ($) value while non-necessities, like diamonds, have high ($$$) value?
Utility | capacity to be useful & provide satisfaction
not measurable and it varies for each person
Diamonds | scarce + utility = $$$
Water | utility, but not scarce (mostly) = $
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TINSTAAFL
- “There is no such thing as a free lunch”
- Is there such a thing as getting something “for free” – ‘buy one get one free’ coupon?
- Things in life are not free, because someone pays to produce it somewhere
TINSTAAFL – “There is no such thing as a free lunch”
Is there such a thing as getting something “for free” – ‘buy one get one free’ coupon?
Business still has to pay for resources, recovers by charging more for other products
So is it really ”free”?
Things in life are not free, because someone pays to produce it
Is there such a thing as getting something “for free” – ‘buy one get one free’ coupon?
Business still has to pay for resources, recovers by charging more for other products
So is it really ”free”?
Things in life are not free, because someone pays to produce it
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factors of production
- Land
- Labor
- Capital
- Entrepreneurs
Economy has 2 groups… Producers and Consumers
Producers
All businesses (individual and billion dollar ones) all have 1 common thing, “factors of production”
Land | natural resources, not created by humans, gift of nature
Capital | tools, equipment, factories used in production
Labor | people; efforts, ability, skill
Entrepreneurs | risk taking individuals introduce new products or services in search of profit
Everything we make requires these 4 factors of production
Producers
All businesses (individual and billion dollar ones) all have 1 common thing, “factors of production”
Land | natural resources, not created by humans, gift of nature
Capital | tools, equipment, factories used in production
Labor | people; efforts, ability, skill
Entrepreneurs | risk taking individuals introduce new products or services in search of profit
Everything we make requires these 4 factors of production
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Productions Possibilities Frontier/curve
- illustrates all possible combinations of output for two products
- called a PPF or PPC
Untitled Slide
All points that lie ON CURVE represent max combinations of output if a company is only making two things, all resources are fully employed.
Outside curve | not enough resources available
Inside the curve | less than max productions & doesn’t fully use resources.
A = inefficient
B, C, D = efficient
X = unattainable
Outside curve | not enough resources available
Inside the curve | less than max productions & doesn’t fully use resources.
A = inefficient
B, C, D = efficient
X = unattainable
Opportunity cost
- what you give up to pick something else
- the next best choice not selected
Opportunity Cost is the value of next best alternative give up. Not always measured in dollars and cents.
Spending time on homework vs with friends
More time on homework; cost is less time with friends
Spending time on homework vs with friends
More time on homework; cost is less time with friends
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Opportunity cost
- what you give up to pick something else
- the next best choice not selected
Opportunity Cost is the value of next best alternative give up. Not always measured in dollars and cents.
Spending time on homework vs with friends
More time on homework; cost is less time with friends
Spending time on homework vs with friends
More time on homework; cost is less time with friends
Photo by Kalense Kid
trade-off
- trade-off is what you must give up when you make a choice
- trade-offs are all the other alternatives you didn't select, opportunity is just the 2nd place choice you didn't select
So…
A trade-off is what you must give up when you make a choice.
How do opportunity costs differ from trade-offs?
Opportunity cost is the next-best choice, while trade-offs are all the other alternatives.
A trade-off is what you must give up when you make a choice.
How do opportunity costs differ from trade-offs?
Opportunity cost is the next-best choice, while trade-offs are all the other alternatives.
Photo by Kalense Kid
Circular flow chart
- Circular flow chart shows how markets connect people & businesses.
Circular flow chart shows how markets connect people & businesses.
Factor Market | all factors of production are bought and sold.
When you sell your labor to an employer in exchange for the wages the employer pays you
Product Market | producers sell their goods & services.
Income you receive in factor market, you spend in product market
Wages & salaries return to businesses…businesses use to produce more …cycle repeats no beginning or end; it is circular
Factor Market | all factors of production are bought and sold.
When you sell your labor to an employer in exchange for the wages the employer pays you
Product Market | producers sell their goods & services.
Income you receive in factor market, you spend in product market
Wages & salaries return to businesses…businesses use to produce more …cycle repeats no beginning or end; it is circular
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Economic Systems answer the three basic economic questions (What, How, Who) in different ways.
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There are many types of economic systems, each with different advantages and disadvantages. While some might claim that one way is better than another there is always a trade off...
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Traditional Economy
- resource use and social behavior are dictated by ritual, habit, or custom
- pro = easy to answer the economic questions
- con = discourages new ideas
The main advantage | the answers to WHAT, HOW, and FOR WHOM to produce are determined by customs and tradition.
The main disadvantage | it tends to discourage new ideas and new ways of doing things.
The main disadvantage | it tends to discourage new ideas and new ways of doing things.
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Command Economy
- a central authority makes the major decisions
- pro = quick change
- con = loss of individual freedom
In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce.
Socialism is a modern, more liberal version of a command economy.
The main advantages | it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford.
Disadvantages | loss of individual freedom to choose, the production of low-quality goods, a large decision-making bureaucracy, and lack of individual initiative.
Only one true command economy still exists… do you know where?
Socialism is a modern, more liberal version of a command economy.
The main advantages | it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford.
Disadvantages | loss of individual freedom to choose, the production of low-quality goods, a large decision-making bureaucracy, and lack of individual initiative.
Only one true command economy still exists… do you know where?
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Communist economies are based on the theoretical ideal of communism, in which everyone contributes according to their abilities and consumes according to their needs.
There has never been a true communist economy
In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce.
Socialism is a modern, more liberal version of a command economy.
The main advantages | it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford.
Disadvantages | loss of individual freedom to choose, the production of low-quality goods, a large decision-making bureaucracy, and lack of individual initiative.
Only one true command economy still exists… do you know where?
Socialism is a modern, more liberal version of a command economy.
The main advantages | it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford.
Disadvantages | loss of individual freedom to choose, the production of low-quality goods, a large decision-making bureaucracy, and lack of individual initiative.
Only one true command economy still exists… do you know where?
Photo by CreateTravel.tv
Market Economy
- Supply, demand, and the price system help people make decisions and allocate resources
- pro = variety of goods
- con = basic needs not met
A market economy is based on capitalism.
Supply, demand, and the price system help people make decisions and allocate resources. People can spend money on what they want and can own resources privately.
Advantages | a high degree of individual freedom and customer satisfaction, a variety of goods and services, the incentive to take care of private property, decentralized decision making
Disadvantages | not providing for basic needs of everyone, a shortage of some services, a high degree of uncertainty.
Supply, demand, and the price system help people make decisions and allocate resources. People can spend money on what they want and can own resources privately.
Advantages | a high degree of individual freedom and customer satisfaction, a variety of goods and services, the incentive to take care of private property, decentralized decision making
Disadvantages | not providing for basic needs of everyone, a shortage of some services, a high degree of uncertainty.
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Untitled Slide
What is it?
- A free enterprise economy has both capitalism and free markets.
- Capitalism includes Economic Freedom and Private Property Rights
- Profit is main motive
- Free markets are decided by supply and demand
A free enterprise economy has both capitalism and free markets.
Characteristics of a capitalistic free enterprise economy include economic freedom, voluntary exchange, private property rights, the profit motive, and competition.
Economic freedom allows you to choose your occupation, employer, and job location.
Capitalism allows voluntary exchange between buyers and sellers which then creates supply and demand.
Private property rights allow people to own and control possessions, which gives them the incentive to work, save, and invest.
The profit motive is largely responsible for the growth of a free enterprise system.
Competition benefits both consumers and the economy.
Characteristics of a capitalistic free enterprise economy include economic freedom, voluntary exchange, private property rights, the profit motive, and competition.
Economic freedom allows you to choose your occupation, employer, and job location.
Capitalism allows voluntary exchange between buyers and sellers which then creates supply and demand.
Private property rights allow people to own and control possessions, which gives them the incentive to work, save, and invest.
The profit motive is largely responsible for the growth of a free enterprise system.
Competition benefits both consumers and the economy.
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Advantages
- Individual Freedom
- Variety of goods
- Competition
Individual freedom is closely related to economic freedom.
Market economies produce a huge variety of goods.
Market economies adjust daily, mainly through the ever-changing prices of goods and services.
Intense competition in a free market capitalist economy promotes economic progress in the form of a continuing supply of newer and better products.
When more and better products are produced in a free market capitalistic system, wealth is created.
Market economies produce a huge variety of goods.
Market economies adjust daily, mainly through the ever-changing prices of goods and services.
Intense competition in a free market capitalist economy promotes economic progress in the form of a continuing supply of newer and better products.
When more and better products are produced in a free market capitalistic system, wealth is created.
Photo by Cayusa
Disadvantages
- uneven economic growth
- gaps between rich and poor
- supplies combine to avoid competition
Periods of uneven economic growth are one of the disadvantages of free enterprise capitalism.
In free enterprise capitalism, the gaps between rich and poor citizens seem to increase.
In free enterprise economies, suppliers tend to combine to avoid competition, which results in fewer participants on the supply side of the market.
Businesses such as corporations have most of the same rights as individuals, but they also have many responsibilities as a result of government-imposed regulations.
In free enterprise capitalism, the gaps between rich and poor citizens seem to increase.
In free enterprise economies, suppliers tend to combine to avoid competition, which results in fewer participants on the supply side of the market.
Businesses such as corporations have most of the same rights as individuals, but they also have many responsibilities as a result of government-imposed regulations.
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In a free enterprise economy… there are roles and responsibilities for the entrepreneur, consumer, and government
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Role of the Entrepreneur
- start new businesses
- create competition
- provide higher quality and lower prices of goods
Entrepreneurs are important because they are willing to take risks to start new businesses, so they become the catalyst of the free enterprise economy.
Most entrepreneurs fail, but some survive and a few even become wealthy.
Successful entrepreneurs attract other firms to the industry, eventually leading to new products, greater competition, more production, higher quality, and lower prices.
Most entrepreneurs fail, but some survive and a few even become wealthy.
Successful entrepreneurs attract other firms to the industry, eventually leading to new products, greater competition, more production, higher quality, and lower prices.
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Role of the Consumer
- spend money to help determine what to produce through demand they create
Consumers ultimately determine WHAT to produce.
The term consumer sovereignty reflects the idea that the consumer rules the market.
Consumers play an important role in the American free enterprise economy because their spending helps determine what is, and is not, produced.
The term consumer sovereignty reflects the idea that the consumer rules the market.
Consumers play an important role in the American free enterprise economy because their spending helps determine what is, and is not, produced.
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Role of the Government
- pass laws to protect citizens
- provide goods and services
- spend money in the market place
Government has become involved in the American free enterprise system because its citizens want it that way.
The government passes laws to help protect citizens from false advertising, unsafe food and drugs, environmental hazards, and unsafe products.
All levels of government provide goods and services for citizens, including education, highways, public welfare, and many others.
The government regulates economic activity to help preserve competition in the marketplace.
The government spends more than all private businesses combined, so it has become a huge consumer in the marketplace.
The government passes laws to help protect citizens from false advertising, unsafe food and drugs, environmental hazards, and unsafe products.
All levels of government provide goods and services for citizens, including education, highways, public welfare, and many others.
The government regulates economic activity to help preserve competition in the marketplace.
The government spends more than all private businesses combined, so it has become a huge consumer in the marketplace.
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Mixed Free enterprise
- people and businesses carry out their economic affairs freely, but are subject to some government intervention and regulation
In a mixed or modified free enterprise economy, people and businesses carry out their economic affairs freely, but are subject to some government intervention and regulation.
The question of how much government involvement is necessary is one of the great unsolved questions of our times.
The American system is a mixed or modified free enterprise economy because the majority of the people want it that way.
The question of how much government involvement is necessary is one of the great unsolved questions of our times.
The American system is a mixed or modified free enterprise economy because the majority of the people want it that way.
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