ECONOMICS CHAPTER 1What is Economics?

WHAT IS ECONOMICS? Economics-the study of

how people seek to satisfy their needs and wants by making choices.

Need-

Want-

Goods

services

SCARCITY AND SHORTAGES?

Scarcity-

FACTORS OF PRODUCTION

Land-

Labor-

Capital - Physical

human

OPPORTUNITY COSTAND TRADE-OFFS

Tradeoffs Opportunity cost

THE DECISION-MAKING GRID

Benefits • Enjoy more sleep• Have more energy during the day

• Better grade on test• Teacher and parental approval• Personal satisfaction

Decision • Sleep late • Wake up early to study for test

Opportunity cost • Extra study time • Extra sleep time

Benefits forgone • Better grade on test• Teacher and parental approval• Personal satisfaction

• Enjoy more sleep• Have more energy during the day

Sleep late Wake up early to study

Alternatives

Karen’s Decision-making Grid

THINKING AT THE MARGIN

Options

1st hour of extra study time

2nd hour of extra study time

3rd hour of extra study time

Benefit

Grade of C on test

Grade of B on test

Grade of B+ on test

Opportunity Cost

1 hour of sleep

2 hours ofsleep

3 hours of sleep

Watermelons (millions of tons)

Shoes(millions of pairs)

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Production Possibilities Graph

Watermelons (millions of tons)

0

a (0,15)

15

8 14b (8,14)

14

18

20

21

12

9

5

0

A productionpossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

PRODUCTION POSSIBILITIES A production possibilities graph shows alternative ways that an economy

can use its resources.

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

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0 252015105

Watermelons (millions of tons)

Production Possibilities Graph

g (5,8)

A point of underutilization

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

EFFICIENCY

Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Watermelons (millions of tons)

Production Possibilities Graph

T

Future productionPossibilities frontier

c (14,12)

d (18,9)

e (20,5)

f (21,0)

a (0,15)b (8,14)

S

GROWTH

Growth If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve “shifts to the right.”

Watermelons (millions of

tons)

Shoes(millions of

pairs)

Sh

oe

s (

mil

lio

ns

of

pa

irs

)

25

20

15

10

5

0 252015105

Production Possibilities Graph

Watermelons (millions of tons)

14

18

20

21

12

9

5

0

0 15

8 14

c (14,12)

d (18,9)

COST Cost: Switching production from one product to

another involves a loss of production for one item.

CHAPTER 2Answering the three economic questions

THE THREE ECONOMIC QUESTIONS

Every society must answer three questions:1. What goods and services should be produced? 2. How should these goods and services be

produced? 3. Who consumes these goods and services?

ECONOMIC GOALS

Economic Efficiency –

Economic Freedom –

Economic security –

Economic Equity –

Econ Growth –

An economic system is the method used by a society to produce and distribute goods and

services.

Traditional economies

Centrally planned economy

Market economy

Mixed economies

WHY DO MARKETS EXIST?

A market Specialization

monetary flow

physical flow

monetary flow

physical flow

Circular Flow Diagram of a Market Economy

Households Firms

Product market

Factor market

Households pay firms for goods and services.

Firms supply households with goods and services.

Households supply firms with land, labor, and capital.

Firms pay households for land, labor, and capital.

THE FREE MARKET ECONOMY In a free market

economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services.

Invisible handSelf interestcompetition

THE INVISIBLE HAND OF THE FREE MARKET

Comes from the great philosopher Adam Smith (18th century)

Made up of two components

Self InterestCompetition

ADVANTAGES OF THE FREE MARKET

Efficiency Growth

Freedom Variety

CENTRALLY PLANNED ECONOMIES

Socialism = Communism=

THE FORMER SOVIET UNION

Soviet Agriculture Large farms called collectives

Soviet Industry Focus on military goods and heavy industry

Soviet Consumers Few available products but very cheap prices

PROBLEMS OF A CENTRALLY PLANNED ECONOMY

Centrally planned economies face problems of poor-quality goods,

shortages, and diminishing production.

monetary flow

physical flow

monetary flow

physical flow

Circular Flow Diagram of a Mixed Economy

Households Firms

Product market

Factor market

Government expendituresexpenditures

governm

ent-

owned facto

rstaxes

taxesgovern

ment

purchases

GOVERNMENT’S ROLE IN A MIXED ECONOMY

In a mixed economy, The government

purchases land, labor, and capital from households in the factor market, and

Purchases goods and services in the

product market.

Continuum of Mixed Economies

Centrally planned Free market

Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick

Iran

North Korea

Cuba

China

Russia Greece Peru United States

South Africa France United Kingdom

Botswana Canada Singapore

Hong Kong

COMPARING MIXED ECONOMIES An economic system that permits the conduct of business

with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations.

CHAPTER 2 OPEN NOTE QUIZ

1. List and describe the goals achieved/advantages of free markets.

2. Describe centrally planned economies.3. What are the three questions that each

society must answer?4. How does socialism differ from

communism?5. What type of economy does the U.S. have?

Why?6. What two factors help to keep free

markets regulated?7. What is the invisible hand?8. What is laissez faire?9. Why are most countries mixed economies?10. What is the primary role of government in

the United States economy?

CHAPTER 2 REVIEW 3 economic questions Centrally planned economies Free market economies Traditional economies Advantages of mixed

economies Advantages of free market

economies What happened to the major

centrally planned economies (China, Soviet Union

Continuum of Mixed economies (especially Canada, U.S. China)

Economic Goals Efficiency Growth Freedom Additional goals (varies)

Invisible hand Self interest Competition Why are most

countries mixed Adam Smith

CHAPTER 3American Free Enterprise

FREE ENTERPRISE Free Enterprise -

BASIC PRINCIPLES OF FREE ENTERPRISE

Profit motive-

Open opportunity-

ECONOMIC RIGHTS

Legal Equality-

Private property-

Free contracts-

Voluntary exchange-

Competition-

WHAT SHOULD GOVERNMENT DO?

Protect Consumers Public Disclosure laws- Protecting Health and Safety-

PROVIDING A SAFETY NET

The Poverty Problem-

Poverty threshold- level of income below what is needed to support families or households. In 2000 a single parent under 65 was $11,869 and a four person family was $17,463.

Government Role-

Yet as a society that prefers limited government activity in the economy, poverty poses tough questions:

A. What can government do to combat poverty? B. What should government do?