Essential Questions:
 How do the basic factors of production influence the choices made by producers and consumers?
 How are the four factors of production used in satisfying wants and needs?
Homework:
 Read Pgs. 496 – 499
 Create flashcards for today’s key terms
 Want
 Need
 Land
 Labor
1
 Capital
 Entrepreneurship (Enterprise)
 Economics

The Fundamental Economic Problem
 Our wants exceed our capacity for satisfying those wants.
 Economic resources are scarce, wants and needs
(uses for those resources) are unlimited.
 Economic Resources:
 Land – Nature-made
(soil, trees, water, animals)
 Labor – Human effort
(workers)
 Capital – Goods used for producing other goods
(machines, tools, factories)
 Enterprise – Managerial function that coordinates other resources
(business owners, risk takers)

The Fundamental Economic Problem
Economics defined:

LAND LABOR CAPITAL ENTERPRISE
ALTERNATIVES (?) ALTERNATIVES (?) ALTERNATIVES (?) ALTERNATIVES (?)

Essential Question:
 What effects do limited natural resources have on the choices made by producers and consumers?
Homework:
 Read Pgs. 499 – 502
 Create flashcards for today’s key terms
 Microeconomics
 Macroeconomics
 Renewable natural resources
 Nonrenewable natural resources
 Limited resources
 Scarcity
2

The Fundamental Economic Problem
 Microeconomics
Study of individual economic decision makers, small units that make up the whole (consumers, firms, government).
 Macroeconomics
Study of the economy’s overall performance, outcomes of the micro decisions (state, national, international).

Economic Systems, briefly…
 Economic system – set of institutions and mechanisms for answering the three fundamental questions of economics – what, how, and for whom.
We will discuss Economic systems in detail later in the unit; this is helpful to know for now!

Class Activity -
 What should be on your desk?
 NOTHING! – clear it all off…you don’t even need a pen, pencil, or writing utensil!
 Where should you be ?
 Gathered in groups of SIX.
 Some groups may have more or less at my choosing.
GO ! ! !

FOOD: four 3-inch strips of green paper
SHELTER: 2-inch white square attached to a yellow triangle
CLOTHING: a four-color paper chain
EDUCATION: a four-page book with color cover

Economics and Resources
 Scarcity – occurs whenever we do not have enough resources to produce all the things we would like to have.
 Resources – the things used in making goods or providing services.
 They include:
 Tools
 Natural resources such as wood, soil, and water.
 Human Resources – people who provide the necessary labor and skills.
 Can any of these last forever?
They are limited.
Renewable/ Nonrenewable Resources –
How would we categorize….

The Three Fundamental Economic Questions
 What to Produce
What goods and services will our economy produce, and in what quantities?
 How to Produce
How will these goods and services be produced? What materials and methods will we use? More labor intensive or capital intensive? Will we ship by truck, train or boat?
 For Whom to Produce
For whom will these goods and services be produced, and how will we distribute them? Divide equally? Should those who produce more receive more? First come first served?

Essential Question:
 What factors influence producers to increase or decrease output?
 What factors influence consumers to increase or decrease the consumption of goods?
Homework:
 Read Pgs. 506 – 509
 Create flashcards for today’s key terms
 Trade-off
 Opportunity Cost
 Marginal Cost
 Marginal Benefit
 Cost-Benefit Analysis
3

Cost Benefit Analysis (CBA)
 Individuals, businesses, and governments engage in systematic comparisons of costs and benefits in order to decide a course of action.
 Often costs and benefits can be subjective, difficult to measure, incomparable, or hidden.
 How do we measure a human life? Should humans be valued differently? If so, by what criteria?
 How much is the last spotted owl worth? What is the cost of letting it die? Is that cost the same for everyone?
 What are the benefits of making consumption of tobacco illegal? What are the costs?

Cost Benefit Analysis (CBA)
“There’s no such thing as a free lunch.”
Milton Friedman
Nobel Laureate, Economics, 1976
(1912 - 2006)
 Everything has an economic cost! Yes, EVERYthing.
 When you decide to do or have one thing, you give up the opportunity to do or have something else.
 Opportunity cost – the next most highly valued alternative you must sacrifice in order to take a particular action.

Cost Benefit Analysis (CBA)
 Opportunity cost – the next most highly valued alternative you must sacrifice in order to take a particular action.
 The opportunity cost of military spending = the government program that would have been funded if military spending did not increase.
 Opportunity costs MUST be included in cost benefit analysis.
 What would you be doing if you weren’t in class today?
 Upon graduation, you get a $75k/yr job offer. What is the opportunity cost of going to college instead?

Five Economic Goals
1) Full employment of economic resources
When resources are not fully employed, society is sacrificing goods and services that could have been produced.
2) Efficiency
Economic efficiency means getting the most benefit out of limited resources. Goods and services that society wants and needs the most should be produced with as few resources as possible.
3) Economic growth
Economic growth is expansion of the economy’s capacity to produce, providing more goods and services. This is necessary for standard of living to increase over time.

Five Economic Goals
4) Fair distribution of income
How will income be divided among members of society? In modern economies, distribution of income determines how output will be shared or divided. Should higher incomes get a larger share of output, or should it be divided equally? Should income be redistributed until there is no poverty?
5) Stable price level
Societies fear inflation (rise in average prices). Inflation redistributes incomes randomly. Those whose incomes rise faster than inflation will get a larger share of output than those whose incomes rise more slowly.

Conflicts and Trade-offs
Trade-off




Essential Question:
 What factors influence producers to increase or decrease output?
 What factors influence consumers to increase or decrease the consumption of goods?
Homework:
 Read Pgs. 517 – 519, 539
 Review flash cards
 Check them against information in your notes and textbook
4

Costs and Decision Making
Marginal Analysis
 Using marginal benefits and marginal costs to make a decision.
 Marginal = additional, or extra
 Marginal costs and marginal benefits are the relevant costs and benefits to compare.
 Marginal costs (MC) = additional costs of doing (producing, consuming, buying) something.
 Marginal benefits (MB) = additional benefits of doing (producing, consuming, buying) something.
 If MB > MC, do it. If MB < MC, don’t do it. Keep doing it til MB=MC.
 Maximum utility, maximum profit, can be found where MB = MC

Measuring Total Output

 US GDP, 2 nd quarter 2008
($ billions)
:
Nominal GDP $14,312.5
Real GDP $11,740.3
 US GDP, 1st quarter 2009
($ billions)
:
(+2.2%)
Nominal GDP
Real GDP
$14,097.2
$11,360.5
(–2.5%)
Source: BEA.gov

Measuring Total Output

Cars produced in a Japanese-owned factory in the
US counts in US GDP.

Cars produced in a US-owned factory in Mexico counts in Mexico’s GDP.

Essential Question:
 What factors influence producers to increase or decrease output?
 What factors influence consumers to increase or decrease the consumption of goods?
Homework:
 Read Pgs. 517 – 519, 539
 Create flashcards for today’s key terms
 Goods
 Services
 Salary
 Wages
 Consumer
 Producer
 Pricing
 Gross Domestic Product (GDP)
 Standard of Living
5

Standard of Living

What is a necessity of life?

What is a luxury?

Are these the same for everybody? The majority?

Is there a right to work? To own a home? To get equal pay for equal work
?

Defining an Economic System
 Economic system – set of institutions and mechanisms for answering the three fundamental questions of economics – what, how, and for whom.
 Two Questions to Ask:
 Who owns the means of production used to produce goods and services?
 Who makes the economic decisions?
(who answers the 3 fundamental questions?)

Defining an Economic System
 All economic systems combine elements of two models at the extremes of a continuum:
Question
Who owns the means of production?
Who makes the economic decisions?
Pure Capitalism
Resources are privately owned
Buyers and Sellers interacting in markets
Pure Command
Socialism
Resources are publicly owned
(owned by the state)
Central planning authority

The Model of Pure Capitalism

Are these things true of the US economy?
1) Private Property & Freedom of Choice
 Private owners of means of production can choose how they sell or use their resources
(labor, machinery, raw materials, farms, etc).
 Firms can decide freely what they will produce and from whom to purchase the necessary resources.
 Consumers are free to spend or save their income however they choose.

The Model of Pure Capitalism

Are these things true of the US economy?
2) Self-Interest
 Adam Smith
(Wealth of Nations, 1776) described a capitalist economy as one in which the primary concern of each player
(producer, consumer, worker) was to promote his or her own welfare.
 Smith’s “invisible hand” doctrine said that as individuals pursue their own interests, they would be led by an invisible hand to promote the good of society as a whole.

The Model of Pure Capitalism

Are these things true of the US economy?
2) Self-Interest
(cont.)
 To maximize profits, producers generate products consumers want most.
 To earn higher wages, workers offer their services where they are most needed.
 To maximize buying power, consumers favor producers offering superior products at fair prices.
 The result? An economy that produced goods and services desired by society, with no need for central government direction.

The Model of Pure Capitalism

Are these things true of the US economy?
3) Markets and Prices
 Economic activity coordinated through markets
(interaction of buyers and sellers of a good or service).
 Markets determine prices, which serve two important functions: i.
To divide up, or ration, goods and services. Only those willing and able to pay the price will receive the product.
ii.
To motivate firms to produce more of some things and less of others.

The Model of Pure Capitalism

Are these things true of the US economy?
4) Competition
 For Smith’s invisible hand to work, pursuit of selfinterest must be guided and restrained by competition.
 Pure competition – large number of relatively small buyers and sellers interact to determine prices.
 No individual buyer and seller is powerful enough to have influence over price.
 Market prices MUST be determined by market forces, not powerful buyers or sellers.

The Model of Pure Capitalism

Are these things true of the US economy?
5) Limited Government Intervention
 Pure capitalism is a laissez-faire
(roughly translated, “let the people choose”) economy.
 Not the role of government to answer fundamental questions
(what, how, for whom).
 Role of government is to ensure environment where market can function.
 Must define and enforce private property rights, and provide means of arbitration and penalties
(laws, courts and prisons).

How Capitalism Answers the 3 Questions
1) What to Produce
 Consumer Sovereignty – economic condition in which consumers dictate which goods and services firms will produce.
 Firms are motivated by profits. The most profitable products tend to be those desired most by consumers, so firms must be responsive to consumer preferences.
“The consumer, so it is said, is the king... each is a voter who uses his money as votes to get the things done that he wants done.”
Paul Samuelson
Nobel Laureate, Economics, 1970
(1915 )

How Capitalism Answers the 3 Questions
2) How to Produce
 Many goods and services can be produced using alternative methods and materials – steel or fiberglass, machine or human, computer or pencil and paper, telephone or internet, brick or wood, skilled labor or unskilled labor.
 Capitalist producers will tend to select the leastcost approach to maximize profits.

How Capitalism Answers the 3 Questions
3) For Whom to Produce
 In a capitalist economy, goods and services will be distributed to those with: a) The ability to pay, and b) The willingness to pay
 A consumer may be able to buy a particular good, but will choose not to, or to consume something else instead.
 In general, those with higher incomes will always have more choices than those with lower incomes, and will receive a larger share of the economy’s total output.