Economics Study Guide
Unit 1: Economics and Choice
Definitions:
Economics is the study of how individuals and societies satisfy their unlimited wants with
limited resources
Economics is the study of how people make choices while attempting to satisfy their
unlimited wants with scarce/limited resources.
Economics is the Production and Distribution of Goods and Services
I.) The Economic Way of Thinking
1.) Scarcity: The Basic Economic Problem
A) People have Wants
B) Scarcity Affects Everyone
Wants vs Needs:
C) Scarcity Leads to Three Economic Questions Wants are desires that can be fulfilled by
1) What will be Produced?
consuming goods or services
2) How Will it be Produced?
Needs are things that are necessary for survival
3) For Whom Will it be Produced?
D) Four Factors of Production
1) Land – Property and/or Natural Resources
2) Labor – Human time, effort and talent
3) Capital – Physical Resources used in Production
4) Entrepreneurship – Vision, Skill, Ingenuity and Willingness to Risk
2.) Economic Choice Today: Opportunity Cost
A) Making Choices: Scarcity forces Choice
1) Motivations behind Choices
2) Costs of Choices: TINSTAAFL
B) Trade-Offs and Opportunity Cost
C) Cost - Benefit Analysis
Opportunity Cost:
You choose to work an after school job rather
than play a sport. The satisfaction and fun of
playing the sport are your opportunity cost.
3.) Analyzing Production Possibilities
A) Fixed Resources
B) Resources Should be Fully Employed (Efficiency)
C) Choices and Trade-Offs
D) Production Possibility Curve
4.) Economic Terms
A) Microeconomics – Study of Individual Players (Families,
Businesses, etc)
B) Macroeconomics – Study of the Economy as a Whole
C) Positive Economics – Uses Scientific Method to Observe and Test
D) Normative Economics – Based on Value Judgments
A State Lottery: A Positive vs a Normative View
Positive Economics can be used to show how a lottery could be used to raise money for the
state to support education. A Normative Economic decision might involve deciding against
the lottery because since studies show poorer people buy more lottery tickets, the lottery is
shifting the burden of supporting education to the poor.
II.) Economic Systems
1.) Introduction to Economic Systems
A) Traditional Economies – Subsistence Farming, Hunter/Gatherer, Survival
B) Command/Planned Economies – The Government “Decides”
C) Market Economies/Capitalism – Driven by Consumer/Individual Choices
Comparing Economic Systems
Communism
Who Owns Resources?
Government
How Are Resources
Allocated?
Government planners
decide how all resources
will be used
What Role Does
Government Play?
Government makes all
Economic Decisions
Socialism
Government owns basic
resources; the rest are
privately owned
Government Planners
allocate basic resources;
market forces allocate
private resources
Government makes
decisions in basic
industries
Market System
All resources privately
owned
Market forces allocate
all resources
Government plays
limited role- mainly to
ensure market forces
work
2.) Market Economies
A) Product Markets – Where Consumers purchase Goods and/or Services
B) Factor Markets – Where Businesses purchase Resources and/or Labor
C) Advantages of a Market Economy
1) Economic and Political Freedom
2) Profit
3) Responsive to Change
D) Disadvantages of a Market Economy
1) No Mechanism to Provide Public Good/Services
2) Cannot Provide Economic Security
3) Economic Inequities
4) Environmental Issues
3). Modern Economies in a Global Age
A) Mixed Economies – Most countries have elements all three types.
B) Changes in Ownership: Nationalization/Privatization
C) Increasing Global Ties – National Economies linked to others
III.) The American Free Enterprise System
1.) Advantages of the Free Enterprise System
A) Open Opportunity – Everyone has the chance to succeed
B) Legal Equality – Each Individual has the same legal rights
C) Free Contract – Each Individual is free to buy or sell to whoever they choose
D) Profit Motive – The goal of earning profits drives the system
2.) How Does Free Enterprise Allocate Resources
A) Producers Seek Profit
B) Consumers Vote with their Wallets
3.) Government and Free Enterprise
A) Providing Public Goods (Goods/Services that Benefit All: Roads, Defense, etc)
B) Managing Externalities (Side Effects caused buy Economic Transactions)
1) Negative Externality: Negatively affects others, ex. Pollution
2) Positive Externality: Provides benefits for others, ex. Packers, College
C) Public Transfer Payments – Transfers income from one group to another
1) Social Security
2) Medicare/Medicaid
3) Unemployment Compensation
4) Food Stamps
5) Veterans Benefits.
Sweden- Social Spending
Sweden - Household Tax Burden
United States - Social Spending
14.7%
USA - Household Tax Burden
9.1%
21.6%
28.8%
Social Spending
Tax Burden
Social Spending
Tax Burden
Total Economy
Total Earnings
Total Economy
Total Earnings