• Chapter 1 What is economics?

Chapter 1

• EconomicsEconomics – study of the choices that – study of the choices that consumers and producers make.consumers and producers make.

• CapitalismCapitalism – United States Economic System. – United States Economic System. Laissez Faire – Free Enterprise – Private Laissez Faire – Free Enterprise – Private Property-Property-

• Adam SmithAdam Smith – the – the ““Wealth of NationsWealth of Nations””

Scarcity• The Fundamental

Economic Problem• Unlimited needs and

wants with limited resources = scarcity which leads to choices for producers.

4 factors of Production

• Human Resources• Capital Resources• Natural Resources• Entrepreneurship

Goods and Services

• Goods—tangible items

• Services—not physical

• *both require scarce resources to produce and satisfy human wants

Assignment1. Define the following terms:ScarcityProductive resourcesEconomicsHuman resourcesLabor EntrepreneurNatural resourcesCapital goodsGoodServices

• 2. Go to page 9, 1.1 Assessment, answer

• 1,4, and 6

• What to Produce?• How to Produce?• For whom to Produce for?

• What to Produce?• How to Produce?• For whom to Produce for?

Trade Offs and Opportunity Costs

• Alternatives –giving up one thing for the use of another

• The next best alternative

• Example – what value does a person lose if they decide to do one thing versus the other

The Production Possibilities Frontier - PPC

tanks

sailboats

PPC continued …

• Trade offs and opportunity costs• The costs of idle resources?• Economic growth• As a entrepreneur – you must decide which

product is in more demand and concentrate your production efforts on the item in more demand by the public.

Forms of exchange

• Barter - trade – ancient societies

• Money – measure of value

• Credit – borrowed money

Journal 2

• Is it likely you will become successful or even rich? Is this important to you?

• What choices for your future might you make differently if you thought you had little chance of success?

• How might you and the economy as a whole suffer as a result of your pessimism?

Chapter 22.1, 2.3

Economic Systems

Types of Economic studies

Microeconomics• Focuses on yours and

others economic behaviors• Focuses on the factors that

influence individual economic choices

• i.e., the smaller picture• the individual pieces of the

economic puzzle

Macroeconomics• Focuses on the

performance of the economy as a whole, especially the national economy.

• Fits all the pieces together looks at the big picture

Types of Economies

Types of Economies

1. Traditional Economies

•Based on custom and tradition•Products produced and distributed among the groups•Only items that are necessary are produced•Rarely used today

Command Economy

• Government officials make decisions

• Planned economies • Ancient system – not

seen today

Market Economies

• Individuals hold control and answer the three basic economic questions

• Self-interest• System is set up to

reward people – incentives exist

Mixed Economies

• Authoritarian / Communism – government controls all factors of production

• Example – U.S.S.R.• Capitalism – government

involvement is limited• Example – U.S.A.

• Democratic Socialism – government ownership is limited to key industries

• Example - Canada

Five features of the U.S. Free Enterprise System

• Free enterprise – an economic system in which business can be conducted freely with limited gov. involvement.

• Private property – people have the right to own private property and enter into contracts.

• Engage in economic competition!• Make decisions based on self-interest!• Participate in the economy with limited government

involvement!

Quiz 1• 1. What are the three economic questions?• 2. _______ focuses on the performances of the economy

as a whole.• 3. _______ looks at the smaller pieces of the economy.• 4. _________ an economic system in which business can

be conducted freely with limited gov. involvement.• 5. _________ the fundamental economic problem.• 6. _________ the study of choices consumers and

produces make.• 7.__________ the American economic system.• 8. _________ economic belief that the government

should leave the economy alone.• 9. __________ political party that believes in the above.• 10. _________wrote “Wealth of Nations”

Circular Flow Model

Types of exchanges :

Households and Government

-households provide resources to the government for income

-households pay taxes to the government for services

Households and Businesses

-households provide resources to businesses for income

-households pay businesses for products

Circular Flow Model Cont.

• Businesses and Government – -businesses provide products to the government

for money– -businesses pay taxes to the government for

service

Key terms :

• Utility - usefulness of a product - The utility of a certain good can vary from person to person.

• Self – sufficiency – when you can fulfill all your needs with no outside influence

• Interdependence – when one area or region is affected because of the events and incidences that occurred in another region.

Key Terms cont.

• Productivity – level of output that results from a given level of input

• Efficiency – the use of the smallest amount of resources to produce the greatest amount of output

• Division of labor – assigning a small number of tasks to each worker

• Specialization – the focus on one activity

2.1Comparative Advantage

Absolute Advantage v. Law of comparative advantage

• Absolute advantage– Being able to do something

using fewer resources than other producers require.

– No need to cooperate

Not the best guide for deciding what to do.

• Law of Comparative Advantage– The worker with the lower

opportunity cost of producing a particular output should specialize in that output

SpecializationOccurs when individual

workers focus on single tasks, enabling each one to be more efficient and productive

Specialization

• Absolute advantage focuses on which of you uses the fewest resources

• Comparative advantage focuses on what else those resources could have produced– That is, the opportunity

cost of those resources– Indicates who should do

what (specialize)

Specialization

• Resources are allocated most efficiently across the country and around the world when production and trade conform to the law of comparative advantage

Specialization• Specialization• Based on comparative

advantage• Did you make anything

that are wearing?• Cotton Shirt• Farmer grows cotton,

someone spun cotton to thread, someone wove thread into fabric,

• Sewed fabric to shirt, store sold it

Division of Labor• Division of labor• Each worker specializes in

a separate task• Allows the group to

produce much more• 1. task assigned to ability

and preference• 2. repetitive tasks makes

perfection• 3. allows for new labor

saving techniques

Homework Assignment

• Chapter 1 and 2 Review economic terms• Write the word and definitions down• P. 29 and 57