Unit 1:“What is Economics” and
Economic Systems
Economics is Dumb!! What’s the Point?
• Why is it important to take this course and at
least be familiar with the basics?
The Fundamental Economic Problem
• The overlying problem that faces ALL people is
trying to figure out if there is ever enough.
• When is enough, enough?
• Scarcity exists throughout all of society; scarcity
is the condition that results from society not
having enough resources to produce all the
things people would like to have.
What is Economics?
• The study of how people seek to satisfy all needs and wants in
society by making choices.
• Why must we make choices? Scarcity.
• Need vs. Want
• Need-A basic requirement for survival (food, clothing, shelter)
• Want-A way to express a need
Economics therefore helps us become better decision makers!
• Is anything ever free?
▫ No, everything will have some degree of a cost.
▫ It can be free to one person, but there will always be a cost.
▫ “THERE IS NO SUCH THING AS A FREE LUNCH”
TISTAAFL
Scarcity  Choice:
Three Economic Questions
• What to produce Societies choices on
production
• How to produce  taking all resources and
finding the best way to combine them.
• For Whom to Produce How will society
distribute the existing supply
Resources: Factors of Production
• I want every person in the room to partner up
and pick one thing between the two of you and
list off all the things that were necessary in order
to produce that product. Try to think of all
things that go into making that product.
Factors of Production-required
resources to produce
• Land “gifts of nature,” or all natural resources
• Labor people who use efforts, abilities, and skills to
produce the product or provide a service (varies over
time)
• Capital tools, equipment, and other human-made
products used to create other products.
• Entrepreneurs The brains who take the resources and
finds a way to combine them for a profit. Risk-taker in
search of profits who does something new with existing
resources. They are driving force in the economy.
• Did you forget any resources used to make the product
you and your partner examined?
Economics as a Social Science
• Deals with the behavior of people as they deal
with the basic issue:
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Description
Analysis
Explanation
Prediction
Description of Economic Activity
• Gross Domestic Product (GDP)-the dollar value of
all final goods and services , and structures
produced within a country’s borders in a 12-month
period
• GDP is the key measure of the nation’s economic
health
• Additional Questions:
What is produced?, Who gets how much?,
Unemployment, Inflation, International trade,
business and labor interactions, and government
spending and taxes
Analysis of economic activity
• Analysis answers the questions
• Why are price of some items high whole others
are low? Why do some people earn higher
incomes than others? How do taxes affect
people’s desire to work and save?
• Analysis helps us to discover why things work
and how things happen
Explanation of Economic Activity
• A way to communicate knowledge determined
through analysis to others to create a common
understanding
• In turn, if we all have a common understanding
of how things work, some economic problems
will be much easier to address or even fix in the
future.
Prediction of Economic Activity
• The study of economics can help to make the
best decision in various situations.
• The study of what is or what tends to be can help
predict what may happen, as well as likely
consequences of different courses of action.
• Actual decision made are the responsibility of all
citizens in a free and democratic society.
The Logic behind Economic Concepts
• First, take 5 minutes to look at the following terms
and write down a brief definition based off what you
believe that concept is talking about. Write it in the
1st column, the boxes with the actual word in them.
• I will now divide you up into groups of 3…as a
group, use the Play-doh to sculpt something that
represents the concept. Be ready to present and
show off your sculpture to the rest of the class.
• In the second column, while the groups explain the
concept, write down what that concept means.
• In the final column, give me an example, a
different explanation, or draw a picture that
makes sense to you. What will help you to
understand it?
Basic Economic Concepts
• Economic Products – Goods and services the are
useful, relatively scarce, and transferable to to others.
• Goods –An item that is economically useful or satisfies
an economic want.
• Consumer goods (intended for final use by
individuals) and Capital goods (manufactured goods
used to produce other goods and services).
• Service – Work that is performed for someone.
• Value – Worth expressed in dollars or cents.
• Paradox of Value – Situation where some necessities
have little value while non-necessities have great value.
More Concepts…
• Utility – The capacity to provide use and
satisfaction.
• Wealth – The accumulation of those products
that are tangible, scarce, useful, and transferable
from one person to another.
Circular Flow Model
• Using the information given on pages 14 and 15
of your text books, give me explanations of all
four sections of the diagram: What is a market?
What are the two groups; businesses and
households? What occurs in both markets?
• Take 4 to 5 minutes to think of some real world
examples(at least 3 for each) of transactions
occurring in the factor market and in the
product market.
Productivity and Economic Growth
Concepts…
• Economic Growth – Happens when a nations total
output of goods and services increases over time.
• Productivity – A measure of the amount of output
produced by a given amount of inputs in a specific period
of time. Productivity goes up whenever more output can
be produced with the same amount of inputs in the same
amount of time. (ie the putting out system vs. mass
production) This applies for all factors of production.
• Division of Labor – Work is arranged so that
individual workers do fewer tasks than before. (ie. The
Assembly Line)
• Specialization – when factors of production perform
the tasks they can do relatively efficiently than others.
More Concepts…
• Human Capital – the sum of skills, abilities,,
health, and motivation of people. (ie.
Education/training and health care)
• Economic Interdependence – Relying on
others and them relying on us for goods and
services. Increase the amount of goods and
services that are available to use. MORE
CHOICES! YAY!
Economic Choices
and
Decision Making
Opportunity Cost
• Trade off-Alternative choices, whenever one
makes an economic decision.
• Opportunity Cost-The cost of the next best
alternative use of money, time, or resources
when one choice is made rather than another.
EVEN TIME HAS AN OPPORTUNITY COST!
The Production Possibilities Frontier
• PPF Curve-A diagram representing various
combinations of good and/or services an
economy can produce when all productive
resources are fully employed.
• Illustrates the concept of opportunity cost.
• You will be asked to examine and interpret the
production possibilities curve in more detail. I
will get you started with the drawing of the
curve.
Questions on the PPC (pgs 21-23)
• Using a different colored pencil than you used to draw the
graph, draw 3 dots on the actual curve and label what these
dots represent.
▫ Underneath your graph, write the number “1” and explain to me
in your own words what these points are telling us about an
economy.
• With another different colored pencil, draw a dot somewhere
INSIDE the curve and tell me what that dot represents.
▫ Write number “2” and explain in your own words what this point
tells us about an economy. What is an example of this?
• With a 3rd different color, draw a second line on the graph
which represents growth of an economy.
▫ Write number “3” and tell me what are the ways in which an
economy is able to grow.
Critical Thinking on the Curve
• Write number “4” and tell me in a couple of
sentences how the graph displays the concepts of
opportunity cost and scarcity.
• Write number “5” and explain to me what you
believe the reasons are for the line being curved
and not straight. (Hint: think about resources in
production of 2 products)
Disclaimer: Models are all based on
assumptions and can be revised!
Final Concepts to Understand
• Cost-Benefit Analysis – comparing the costs
received from an action to the benefits.
• Free Enterprise Economy-An economy in which
consumers and privately owned businesses, rather
than the government, make the majority of the
WHAT, HOW, and FOR WHOM decisions.
• Standard of Living – the quality of life and the
goods and services which make life easier.
• Rational Thinking – We must all be
selfish…taking the things that have greater value
and giving up the things with lesser value.
Economic Systems (p.38)
• Which system are you?
Types of Economic Systems Review
Match the following statements with the proper economic system.
A. Traditional Economy
B. Command Economy
C. Market Economy
1. Decentralized decision making
2. Requires a large bureaucracy, which consumes many resources
3. New and different ideas are discouraged, no room for individuality
4. Has the lowest standard of living
5. Workers and businesses face uncertainty as a result of competition
and change
6. The main advantage is that it is stable, predictable, and has
continuous life.
Traditional Economy
• An economy in which the allocation of scare
resources, and nearly all other economic activity,
stems from ritual, habit, or custom.
• Characteristics?? Examples??
Command Economy
• An economy in which a central authority makes
most of the WHAT, HOW, and FOR WHOM
decisions.
• Characteristics?? Examples??
Market Economies
• An economy in which people and firms act in
their own best interests to answer the WHAT,
HOW, and FOR WHOM questions.
• Characteristics?? Examples??
Economic and Societal Goals
• Read about your assigned goal (pages 41-43) and then
create a billboard that you will later use to share with the
class. The Billboard should include:
- A one line statement to promote the goal
- A creative image to promote the goal
- Example from your life
- A description of the goal
Useful terms:
• Cost-Benefit Analysis – comparing the costs received from an action
to the benefits
• Inflation-a rise in the general level of prices
• Fixed income-an income that does not increase even though prices go
up
Future Goals/Trade-Off Among Goals
• As society evolves, it is entirely possible that new
goals will be added. (ie. Cleaner environment or
preservation of endangered specices)
• Goals themselves may sometimes conflict with one
another…
1. Full Employment vs. Individual Freedom (ie.
Protecting Domestic Business with high tariffs vs.
Choices)
2. Economic Growth vs. Stability and Security (New
businesses' may harm existing buisnesses)
3. Equity vs. Freedom (Minimum wage laws)
Economic and Social Goals Review
Match the following economic goals to the proper explanation.
A. Economic Growth
B. Full Employment
C. Economic Efficiency
D. Economic Freedom
E. Economic Security
1. Having an economy that allows for most all people seeking jobs to be able to
obtain them.
2. Being sure not to waste resources and finding technology possible to make
sure benefits gained are greater than costs incurred.
3. The idea that we desire protection from difficult economic events that could
result in layoffs; an example of this protection is social security.
4. A focus on output increasing year in and year out; that our standard of
living gets better from one year to the next
5. People have the right to choose their own occupations, employers, and uses
for their money.
Capitalism and Economic Freedom
• An economy where private citizens, many of whom
are entrepreneurs, own the factors of production.
• Also called Free Enterprise. Competition is allowed
to flourish with a minimum of government
interference.
• There are 5 Characteristics…
1. Economic Freedom
2. Voluntary Exchange
3. Private Property Rights
4. Profit Motive
5. Competition
Characteristics of Free Enterprise
1. Economic Freedom  People may choose their
jobs, employers, and how to spend their money.
Business may choose what products to sell and what
to charge for them.
2. Voluntary Exchange  The act of buyers and
sellers freely and willingly engaging in market
transactions. The desire is that both buyer and seller
will believe themselves to be better off from the
transaction than what they began. In the end, the
transaction should benefit both the buyer and the
seller.
Continued...
3. Private Property Rights  The privilege that entitles
people to own and control their possessions as they wish;
provides incentive of people to want to succeed knowing
that all they achieve is theirs to do as they please. Includes
both tangible and intangible items.
4. Profit Motive  The driving force that encourages
people and organizations to improve their material wellbeing; the idea that what we have will be better off than
what we started with. Largely responsible for the growth of
a free enterprise system based on capitalism.
Profit-The extent to which persons or organizations are
better off at the end of a period than they were at the
beginning.
Continued.
5. Competition  The struggle among
producers and sellers to attract consumers, while
lowering costs. The idea that producers will do
what they need to do to compete for the money of
consumers. Buyers compete to find the best
products at the lowest prices.
Key Concepts Review
1. The privilege that entitles people to own and control their possessions as they wish.
2. The struggle among sellers to attract consumers while lowering costs
3. Describes the role of the consumer as the ruler of the market place.
4. The act of buyers and sellers freely and willingly engaging in market transactions
5. An economy where private citizens, many of whom are entrepreneurs, own the factors of
production.
6. The driving force that encourages people and organizations to improve their material wellbeing.
7. A rise in the general level of all prices
8. The capacity to be useful and provide satisfaction
9. The measure of the amount of output produced by a given amount of inputs in a specific
period of time.
10. Occurs when a nation's total output of goods and services increases over time.
A. Productivity
B. Inflation C. Capitalism
E. Private Property Rights
AB. Voluntary Exchange
AD. Profit Motive AE. Consumer Sovereignty
D. Economic Growth
AC. Competition
BC. Utility
Roles of Capitalism
• On the handout are 3 columns of groups of people
who have specific roles in our economy. I am going
to have you work with 3 different sets of partners to
examine the 3 groups of people working to make our
economy function.
• You will have 10 minutes per partnership before I
ask you to rotate to a new partner to examine the
next group.
• Be sure to note and key concepts and examples for
each role!
(What should these groups roles be? Question and
discussion.)
The Role of the Entrepreneur
• Organizes and manages land, capital, and labor in
order to seek profit. Entrepreneurs are the ones who
start up new businesses such as restaurants,
automobile repair shops, Internet stores, and video
arcades.
• The sparkplug and the catalyst of the Free
Enterprise System! (ie. Mary Kay Ash, Bill Gates,
Alexander Graham Bell)
• An entrepreneur’s search for profits->new products>greater competition->more production->higher
quality->lower prices for consumers
The Role of the Consumer
• Consumers have the power in the economy
because they determine which products are
ultimately produced.
• Consumer Sovereignty-Describes the role of
the consumer as sovereign, or ruler, of the
market. The dollars consumers spend are the
“votes” used to select the most popular products.
• “The customer is always right”
The Role of the Government
• Protector-Enforces laws against false or
misleading advertisements, unsafe food and
drugs, environmental hazards, and unsafe
automobiles. The government also enforces laws
pertaining to individual freedoms, property
rights, and contracts. They make sure everyone
is following the ‘rules of the game’ to ensure an
efficient and fair economy.
Continued…
• Provider and Consumer-All levels of government
provide goods and services
-National Government-Defense services
-State Government-Education and Public Welfare
-Local Government-Parks, libraries, and bus
services
Continued…
• Regulator- Preserves competition in the
marketplace.
-National Government-Oversees interstate
commerce, communications, and entire industries
such as banking and nuclear power.
-State Government-Insurance rates and
automobile registrations,
-Local Government-Business activity with
building and zoning permits.
At times regulation is controversial! Why?
Continued…
• Promoter of National Goals-Reflects the will of the
majority. At times results in modifications. (ie.
Social Security, Child Labor, and Minimum Wage)
- Mixed Economy or Modified Free/Private
Enterprise Economy-People carry on their
economic affairs freely, but are subject to some
government intervention and regulation.
The United States has in fact a ‘Mixed
Economy’ or a ‘Modified Free/Private
Enterprise Economy!’ WHY??
Examining the International Spectrum
• Chapter 17 Sections 1 and 2;
Trade
• Based off the fact that one country or geographical area
may be better suited to produce a product than another:
Specialization;
• Specialization of a country is always based off the
resources that can be obtained (factors of production)
• Exports-The goods and services that a country
produces and then sells to other nations
• Imports-goods and services that one country buys from
another country.
WHY DO WE TRADE? Without international trade, many
products, would not be available on the world market. This
includes both wants (banana from Honduras) or needs
(crude oil or other minerals, metals, and raw materials).
US Imports (Oil)
US Exports
Basis for Trade
In many cases, it may be cheaper for a country to
import a product than to manufacture it.
• Absolute Advantage  when a country can
produce a product more efficiently (with greater
output per unit of input) than another country
• Comparative Advantage  when a country
can produce a product relatively more
efficiently, or at a lower opportunity cost.
Comparative Advantage
• Ask yourself, how much does it “cost”
China to produce shoes instead of cloth?
• Ask the same question for India?
The Gains from Trade
• People will be better off producing the product
that has a lower “cost” to them.
Absolute and Comparative Advantage Review
Using the following
graph, determine
who has the
comparative and
absolute advantages
for the production of
cloth and shoes.
Restricting International Trade
• Tariffs  a tax placed on imports to increase
their price in the domestic market;
• Protective Tariff  a tariff high enough to
protect less-efficient domestic industries;
• Revenue Tariff  a tariff high enough to
generate revenue for the government without
prohibiting imports
Quotas
• A limit placed on the quantities of a product
that can be imported; again, to protect domestic
producers (i.e. the Bush Administration placed a
quota on the steel industry at the cost of higher
steel prices for the rest of the country.)
• Also, prevents dumping, or selling products
abroad at lower than cost to produce them at
home
• WHY would a business lose money by
“dumping?”
Other Types of Barriers
• Health Inspections
• License to import
• Nationalism and culture (ie. preferring regional
and traditional foods to genetically altered
foods)
Protectionists
• Favor trade barriers that protect domestic
industries:
▫ National Defense – we do not want to become too
dependent on other countries;
▫ Promoting Infant Industries – new companies should
be protected from foreign industries;
▫ Protecting Domestic Jobs – against the cheap foreign
labor;
▫ Keeping money at home – have our money count
towards our GDP;
▫ Helping Balance of Payments – helps balance the
amount of money going out that is coming in
Free Trade Movement
• Fear that tariffs and quotas will cause disputes amongst
countries, bringing retaliation;
• If all countries use free trade then the world resources
will be used more efficiently and will be less costly across
the world;
• Reciprocal Trade Agreements Act-An amendment to the
Smoot-Hawley Tariff passed during the Great
Depression. Stated that it would allow reduced tariffs up
to 50 percent if other countries agreed to do the same.
• (WTO) World Trade Organization-an international
agency that administers trade agreements, settles trade
disputes between governments, organizes trade
negotiations, and provides technical assistance and
training for developing countries.
NAFTA (North America Free Trade Agreement)
• The purpose of NAFTA is to liberalize free trade
by reducing tariffs in Canada, Mexico, and the
United States. Partners capitalize on their
comparative advantages for everyone’s benefit.
• The ultimate goal is to stimulate growth and
provide a variety of products to all countries
involved.