Basics of Economics
An Introduction
Bell Ringer
• There are 14 students, yet I only have ten
pieces of candy.
• How do I decide who gets a piece?
• Hand out candy.
• Offer a choice: instead of candy you can
have one point extra credit.
• But first, depending on your choice, what
will you give up?
Essential Questions
• What is economics?
• Why does scarcity and opportunity cost dictate
economic choices?
• What are the three basic production questions
asked in order to deal with scarcity and
opportunity cost?
• How do different nations answer the three
production questions?
• Why are the factors of production an important
aspect of the three production questions?
Economics
• Economics is the study of how people, societies,
industries, and governments choose to use resources.
• Microeconomics is a branch of economics that studies
the behavior of individual households and firms in
making decisions on the allocation of limited resources
– Typically, it applies to markets where goods or services are
bought and sold.
– Microeconomics examines how these decisions and behaviors
affect the supply and demand for goods and services, which
determines prices, and how prices, in turn, determine the
quantity supplied and quantity demanded of goods and services.
Economics
• Macroeconomics is a branch of economics dealing with
the performance, structure, behavior, and decisionmaking of an economy as a whole, rather than individual
markets.
– This includes national, regional, and global
economies.
– Macroeconomists study aggregated indicators such
as GDP, unemployment rates, and price indices to
understand how the whole economy functions.
Founding Principles
"Economics is the science which studies human behavior as a relationship
between given ends and scarce means which have alternative uses."
-- Lionel Robbins, An Essay on the Nature and Significance of Economic
Science (London: MacMillan, 1932)
Scarcity
Opportunity Cost
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is the fundamental economic problem
of having seemingly unlimited
human wants and needs in a world of
limited resources
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It states that society has insufficient
productive resources to fulfill all human wants
and needs.
Alternatively, scarcity implies that not all of
society's goals can be pursued at the same
time; trade-offs are made of one good
against others.
•
•
Trade off is when you give up one thing for
another.
It therefore, heavily impacts how the thr
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the value of the next-highest-valued
alternative use of that resource.
If, for example, you spend time and money
going to a movie, you cannot spend that
time at home reading a book, and you
cannot spend the money on something else.
If your next-best alternative to seeing the
movie is reading the book, then the
opportunity cost of seeing the movie is the
money spent plus the pleasure you forgo by
not reading the book.
The impact of scarcity and
opportunity cost
• People and the economy have to make decisions about
what to produce and what to buy under the condition of
scarcity
• Producers make what they think consumers will buy so
the resources they use and the price associated with
them are determined by the perceived profit that can be
made
• Consumers have to decide between wants and needs in
order to determine what to spend their limited resources
on.
– Wants: things they are not necessarily to sustain life
– Needs: things necessary to life; i.e. food, shelter, water.
In a PURE MARKET ECONOMY there is no
government involvement in economic decisions. The
government lets the market answer the three basic
economic questions:
1. What will be produced? Consumers decide what
should be produced in a market economy through the
purchases they make.
2.
How will it be produced? Production is left entirely
up to businesses. Businesses must be competitive in
such an economy and produce quality products at
lower prices than their competitors.
3.
For whom to produce? In a market economy, the
people who have more money are able to buy more
goods and services.
Capitalism features private ownership of
businesses and marketplace competition.
It is the same as a free enterprise system
,laissez faire, and market economy
The political system most frequently
associated with capitalism is democracy.
The Four Factors of Production
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•
•
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Land, labor, capital & entrepreneurship
Used to answer the basic economic questions
Are the resources (essential ingredients) of
economic activity
Goal of economic activity = productivity
o Amount of goods & services the
economy creates
o Depends on how producers combine
the 4 factors
Four Factors
Capital
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•
•
Has a few meanings
Entrepreneurship
•
Financial capital
•
An investment resource used in
production
o Invests in new businesses or
expands already existing
businesses
Capital goods:
o
o
Products that can be used in the
production of different products
but that are not part of the new
product
Examples: machinery, buildings,
stocks of raw materials
•
•
Human resource that
brings land, labor, and
capital together by starting,
operating, and expanding
businesses
Create productivity through
their enterprise
Operate businesses to
make a profit
o
Reward for the economic
risk of entrepreneurs
Four Factors
Land
•
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An economic resource as
property
Landowners earn money
from property through:
o
o
o
Charging Rent
Leasing
Selling
Land adds natural
resources to production
o
o
••
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Labor
Renewable Resources:
trees
Nonrenewable Resources:
minerals, fossil fuels
Provided by workers
Also known as human capital
o
A person’s potential for
economic productivity
Some potential comes
naturally:
o
o
Talent for drawing
Being good at math
What helps develop human
capital?
o
o
o
Education
Training
Good Habits of Character
Productivity
••
••
••
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Economies strive to achieve maximum productivity
Definition: the relationship between the 4 factors that go into production &
the goods and services that come out of production
Increases to the extent that input creates more output
In general a society’s degree of productivity determines its average
standard of living
The level of wealth, comfort, material goods and necessities available
to a certain socioeconomic class in a certain geographic area.
Increased by the efficient use of production
An economy is efficient when the cost of producing a given good or service
is as low as possible and equal to its price
In an efficient economy, resources are used in ways that maximize their
intended values
Actions that make the economy more efficient increase its overall wealth
•
In a PURE COMMAND ECONOMY there is complete
government involvement in economic decisions. The
government answers the three basic economic questions:
1. What? In a command economy, government officials
decide what will be produced and in what amount.
2.
How? Production is left entirely up to the
government. The government owns the means of
production. Businesses and property belong to the
government.
3.
For whom? In a command economy, the
government decides for whom to produce without
considering market demand. A command economy is
designed to keep a few people from becoming rich
while the rest of society struggles or winds up in
poverty.
Communism is a pure command
economy.
•In this system, land, property, and businesses
are in the hands of the government.
•The state owns the factors of production, and
government officials decide the answers to the
basic economic questions.
Economic Systems
• There are no PURE market economies.
• There are no PURE command economies.
Mixed Economies
Nearly all modern world
economies have characteristics
of both market and command
economic system. They are called
mixed economies.
Mixed Economy
Mixed economies are not totally
command or totally market. They
have elements of both.
However, some mixed economies
lean more towards free markets and
some tend to lean more toward
command structures.
Mixed Economy
The United States is not totally a
market economy. It is a mixed
economy.
Example 1: The economy of the
United States is based on private
enterprise. However, some
industries (for example, power
companies and railroads in some
areas) are under collective ownership.
Example 2: The United States government is
involved in the economy through laws and
regulations governing businesses, and it
provides socialistic programs, such as welfare,
Medicaid, and Medicare.
Example 3: The government monitors how
stocks are traded, outlaws monopolies, and will
intervene if inflation gets out of control.
HOWEVER, the United States government
tries to let the market operate as freely as
possible.
Mixed Economy
China is not a totally command
economy It is a mixed economy. It
places strict controls on its economy,
and many of the larger industries are
owned by the state. In recent years,
though, China’s desire to compete
economically in the world has led it to
allow some private ownership and
business.
It is possible to look at economic
systems along a continuum.
Typically, the continuum runs
from a Pure Command Economy
to a Pure Market Economy.
On a continuum, from Pure Command
Economy to Pure Market Economy,
economic freedom runs from none to total.
On notebook paper, draw and label this continuum.
1. Place the economy of the United States on your
continuum.
2. Place the economy of Cuba on your continuum.
3. Place the economy of the People’s Republic of
China on your continuum.
•On this continuum, the economy of the United States would
be placed closer to the right-hand side of the line than the
left-hand side.
•China would be placed much closer to the left-hand side of
the scale.
•Cuba would be placed closer to China than the United
States.
(Of course, the placements on the continuum could change if
political or economic changes are made in these countries.)
As you can see, when studying different
economic systems, it is good to view them on
a continuum.
Quick review: On this continuum where would
you place the China? Cuba? Where do you
think you should place Mexico?
Task:
In a well-written paragraph, explain why
the United States economy is placed
where it is placed on this continuum.
Why the United States is placed where it is on this continuum?
The economy of the United States is not a pure market but instead is
a mixed economy leaning toward market. The United States has
some market elements in the economy. The United States also has
some elements of a traditional economic system . For example,
goods are often exchanged or bartered at a flea market. The United
States also has some command elements. For example, the U. S.
government controls the production of some goods (like nuclear
weapons) or decides who will get some goods (such as food stamps).
Traditional
• A traditional economy is defined by three characteristics
– It is based on agriculture, fishing, hunting, gathering
or some combination of the above.
– It is guided by traditions.
– It may use barter instead of money
• Typically located in third world nations that are
considered to have emerging economies
• All economies are thought to have evolved from
traditional roots
• Is not usually placed on a continuum
Application
• Think of a resource that is scarce in your
personal life: it could be a tangible or
intangible resource
– Why is it scarce?
– How do you determine its utilization?
– What is the opportunity cost associated with
this above decision?
Application
• Go to
http://www.heritage.org/index/country/brazil
• Determine the type of economy for the following
nations:
– Brazil
– Hong Kong
– Venezuela
– Estonia
• For each provide evidence for your answer.
• Finally, place each on a market continuum.