Intro to Econ Notes

• The basic economic problem is that ______________ exists.

• Productive resources are ____________, but our desire for goods (food, clothing, refrigerator, and computers ... tangible items) and services (legal advice, medical care, dry cleaning, food preparation, banking, and provision of internet service …intangible items) is _________________. UNLIMITED

LIMITED

SCARCITY

Goods are things you can touch

Services are things that you cannot touch

Choices

• Because we cannot have everything we want, we must make choices among the alternative uses of the resources available. Do we produce guns or butter? Do we produce __________________ goods or _______________ goods (and in what quantities)?

CONSUMER

CAPITAL

Capital goods are things like factories

Consumer goods are things that are made in factories. Things you want to but

• Do we produce the goods that consumers are willing and able to purchase or do we produce the goods that government decision makers select?

• How are the resources to be utilized? • Will we focus on labor-intensive methods? • How will the goods be distributed once

they are produced? • Will everyone share equally in the output

that is produced or will some receive more than others?

• The problem of scarcity requires that choices be made.

Defining Economics

• Because the problem of scarcity forces us to make decisions, economics is sometimes called the study of _________.

• We cannot have everything we want; therefore, we must decide how to utilize limited productive resources to achieve the maximum satisfaction of our wants.

CHOICES

• Economics can then be defined as the study of the utilization/allocation of scarce resources in the production, distribution, and consumption of ____________ and __________ to address the problem of scarcity.

• Due to the universality of scarcity, all societies past, present and future face this problem.

• The way each society deals with the problem of scarcity depends on the special mix of resources it has available and the values and goals of the society.

SERVICESGOODS

Productive Resources (factors of production):

• Resources used to produce goods and services are called _____________________ of ___________________________.

• The four factors of production are: – Land– Labor – Capital – Entrepreneurship

PRODUCTION

FACTORS

Land

• ______________:Natural

resources utilized in the production process; land, crude oil, water, vegetation, minerals, etc.

LAND

Labor

• ______________: the human resource in production; human mental and/or physical efforts exerted in the production of goods and services

LABOR

Capital

• ______________:goods used to

produce other goods in the production process: machines, equipment, tools, the factory, etc.

CAPITAL

Entrepreneurship

• __________________:the ability to combine land, labor and capital to produce goods and services; requires initiative, risk taking, and organizational abilities. The preceding characteristics distinguish entrepreneurship from the other human resource – labor.

ENTREPRENEURSHIP

Henry Ford

Bill Gates

Distinguishing capital goods and consumer goods:

• Capital (machinery, equipment, tools, factories, etc.) is the only resource that is also a good.

• Capital goods are distinguished from consumer goods in the former (capital goods) satisfy human wants indirectly and the latter (consumer goods) satisfy human wants directly.

For Example• If we choose to produce more

_______________ goods, we will have to forgo current consumption; however, adding to our existing capital stock will increase our productive capacity, allowing us to produce more in the future,

• for example, assume the economy could only produce ______________________ and __________________ with the resources available.

• A decision to produce more tractors would mean less ______________ could be produced; however, more tractors would add to the stock of existing resources making it possible to produce more wheat in the future.

CAPITAL

TRACTORSWHEAT

WHEAT

• A decision to produce more _________________ instead of tractors would mean more food now;

• however as the current tractors wear out and break down, there will be fewer replacements; therefore, the future productive capacity will be restricted by a decision to produce fewer capital goods (tractors).

WHEAT

Economic systems and the basic economic questions:

• Because decisions have to be made in a world of scarce resources, economists analyze the decision-making apparatus or mechanism by which a society decides how it will use its resources to satisfy human wants. A society’s mechanism for economic decision-making is its _________________________________, the means by which society makes the necessary choices about how scarce resources (factors of production) will be utilized.

ECONOMIC SYSTEM

• Therefore, every economic system has to answer the three basic economic questions:

• ____________________ is to be produced and in what quantities?

Will the emphasis be on consumer goods (goods for immediate consumption; these goods satisfy wants directly) or on capital goods (goods used to produce other goods; these wants indirectly)? Will we produce guns or butter?

WHAT

• ________ are goods and services to be produced?

The answer to this question depends on the particular mix of resources available to a society. If the population is well educated and technology is advanced, production is likely to be capital intensive (emphasis on the use of machines/technology). If the population is large but relatively unskilled, production is likely to be labor intensive (relying on manual labor rather than machines).

HOW

• _______ _______ are goods and services to be produced?

Who is going to get the goods and services once they re produced? Will the people share equally in the distribution of the good and services produced or will goods be distributed only to those who are willing and able to purchase them?

FOR WHOM

The three basic economic systems:

• Because societies differ in their values and goals, there are different means or mechanisms (economic systems) for making the choices required by the three basic economic questions. Economists have identified three basic economic systems: _____________________, _______________________, and ___________________________.

MARKETTRADITIONAL

COMMAND

• Customs or tradition is the basis for deciding the questions of what, how and for whom in a

_________________________ economic system.

• If your father and his father before him produced wheat, then you will produce wheat.

• The wheat is produced by the same methods that were handed down from previous generations. You are producing ONLY ENOUGH to feed the family and perhaps a little extra to barter for

• other goods and services. • Such a system is typically found in the • rural areas of lesser-developed nations• of the world.

TRADITIONAL

• In a __________________ or controlled system, the what, how and for whom questions are answered by central economic planners (government policymakers).

• The government plans the production and distribution of all or most goods and services. The economy of the former Soviet Union and the economy of the People’s Republic of China under Mao are examples of command systems.

COMMAND

• The interaction of buyers and sellers • (consumers and producers) in the• marketplace determines what will be • produced, how it will be produced, and who will get

the good or service in a • _____________________ economy. Reliance on a

system of prices (established by the interaction of the forces of supply and demand) guides economic decision-making and precludes a role for government in the economy. The economies of the United States and Japan are market-based economies.

MARKET

Economic theories:

• Do pure systems exist in the world today? This is highly unlikely; however, the command and market systems are based for two modern day theories of economics. The ________________ system is the basis for the theory of ____________________ or _________ _______________________, a theory promoted by Adam Smith in his book, The Wealth of Nations,

MARKET

CAPITALISM FREEENTERPRISE

Socialism• the __________________ system is the basis

for the modern day theory of socialism.• Socialism can further divided into

__________________ socialism (where the government controls the economy and the people control the government),

• and _____________________________ socialism (where the government controls the economy and the people).

• Most authoritarian socialist regimes of the past have been controlled by communist parties; therefore, the systems have been labeled “communist.”

COMMAND

DEMOCRATIC

AUTHORITARIAN

Karl Marx

• According to the theory of _____________ ________________, communism evolves from socialism when the state “withers away” and government is no longer needed.

• Due to the strong presence of the “state” or government in most “communist” nations, those systems are more appropriately labeled socialist.

MARXKARL

Mixed Economies• Most economies are a varying mix of the three

basic economic systems. Even the most developed nations of the world (U.S., Japan, Germany, etc.) have pockets of the economy that remain traditional; however, these are isolated cases rather than the standard.

• Although all nations have mixed economies, the terminology “______________ _____________________” usually designates an economic system that is mainly market but has varying degrees of government regulation and decision making that alters market decisions.

• By this definition, the U.S. economy is a “_____________________ ____________________.”

ECONOMIESMIXED

MIXEDECONOMIES

Economic Decision Making

• Regardless of the type of economic system utilized, ____________________ exist and choices must be made.

• Due to limited resources, every choice to produce a good or service or in some way to utilize a scarce resource involves a __________________.

• A trade-off is basically an exchange – to get something, you have to give up something.

SCARCITY

TRADE-OFF

For Example• For example, on a Saturday night you have

several options for what to do with your time. You might go on a date, attend a movie with a friend, wash your hair, or study economics.

• Assuming that time is limited, you can only select only one of the alternatives. Whatever choice you make, you must give up (_______ _____) your most valued alternative.

• Since most of you would prefer to spend your Saturday nights studying economics (choice one), your decision to story economics means that you must give up (___________ _____) the option of washing your hair (second choice).

TRADEOFF

TRADE OFF

Opportunity Cost• Economists refer to forgone opportunities (such

as washing your hair in the above example) as ____________________ __________.

• Opportunity cost may be further defined as: 1) the most valued alternative not chosen or 2) what you or society must give up when making a choice.

• In a world of scarce resources, economists are concerned not only with direct or explicit money cost of a choice; they are concerned with the implicit cost- what you had to give up as a result of your decision.

OPPORTUNITY COST

For Example

• For example, a decision to go to college would include not only the direct cost of tuition, books, etc., but also the implicit cost associated with the loss of the salary you could have earned if you had chosen to go to work instead of attending college.

• READ THE NEXT SECTION ABOUT OPPORTUNITY COSTS.

• WHAT IS THE CONCULSION OF THE PARAGRAPH?

• WRITE A ONE SENTENCE CONCLUSION