Economics
CHAPTER 1 AND 2
What is Economics?

What is economics?
Social science of decision-making.

“Economy is the art making the most out of life.”
Gary Becker
Scarcity
1.
2.

Limited Supply AND
Desirable
More important b/c nearly everything is limited at any particular
moment in time.
3. OR more than one valuable use.
Is it scarce? Handout
Opportunity Cost

The value of the next best alternative you give up when you make a
decision.

Only the next best choice
TINSTAAFL

There is no such thing as a free lunch.

Opportunity COSTS

Joe’s

Arnie’s

Society’s
Factors of Production
(Resources)
A.K.A.—factors of production
Makes all g/s
Land—natural resources
Labor—paid human effort
Capital—g/s used to make other
resources
Physical
Human
Entrepreneurship
Risk taker
Combine other factors
Micro vs. Macro
Microeconomics—study of
how individuals, businesses,
or markets make decisions
Macroeconomics—studies
how economic activity in
the aggregate—all the
businesses or all the
consumers
Production Possibilities Curve
 Demonstrates
tradeoffs and opportunity
cost of producing two items
 Also
demonstrates marginal thinking
Why? Resources are
easily convertible
10
8
6
4
2
Constant opportunity
cost—opportunity costs
stay the same for the
entire curve. For each
and every square, it costs
two triangles.
Triangles
Constant
Opportunity
Cost
1
2
3
4
Squares
5
Increasing
Opportunity Cost
Increasing Opportunity
Cost—
As the production of
one good increases, the
costs of producing the
other good gets higher
and higher.
Why? Resources are
not as easily converted.
What different places
mean.
W is currently unattainable,
to get to W you must shift
the curve by acquiring new
resources
Points inside the curve show
inefficiency and/or
unemployment
Points on the curve A-E are
productively efficient—make
the most g/s possible with
resources.
Production Possibility Shifts

Shifts outward if more resources or improved technology

Shifts inward if resources are lost

More physical capital goods=more of a shift outward
Economic Systems

An organized way to produce and distribute goods and services.

Market, Command, Traditional, Mixed
3 Economic Questions every
economic system must answer
What
will be produced?
How will it be produced?
Who gets the g/s?
Traditional Economy

3 Q’s answered by habit,
custom, tradition

Little freedom

Ex. Intuits, Aboriginals, Native
Americans, African tribes

Advantages—little
uncertainty, Social Capital

Disadvantages—discourage
new ideas, economic
stagnation
Command Economy

Govt. answers the 3 questions

A.k.a—central planning

Price system vs. rationing

No private property

Ex. Former Soviet Union, Cuba, N.Korea
Command Economy
Advantages
Disadvantages

Less uncertainty—Job security

Little growth

Change direction quickly—ex. ag
to industry, race to space

Little freedom

Perverse Incentives

Power is centralized with the
government, needs a large
bureaucracy

Little Flexibility
Market Economy

Aka capitalism

People make the decisions

Characteristics

Private Ownership--capitalism

Consumer Sovereignty

Examples

GB, Canada, U.S., Singapore, S.Korea, Japan
Adam Smith
 The
Wealth of Nations
 Father
of Economics
 Self-Interest
Motivates
 Competition
Regulates
Market Economy
Advantages

Freedom

Gradual Adjustments

Decentralized Decision Making

Variety of G/S

Provides Incentives for Hard Work

Provides Incentives to Conserve
Resources
Disadvantages

Rewards only productive resources

i.e. not everyone is provided for

Uncertainty—boom and bust cycle

Market Failures

Lack of Competition

Lack of Information

Externalities—3rd party is harmed/helped by
someone else’s actions.

Positive—produces benefits to society that cost
someone money

Negative—produces a detriment to society that
saved someone money

Providing Public Goods—market will not provide
these

Non-excludability—cannot exclude someone

Non-rivalry—one person’s consumption does
not limit other people’s consumption

Examples

Free Rider Problem
Mixed Economic Systems

All economies are this!!!

Depends on the degree of government intervention

Socialism—

gov. owns some basic resources. ex. 90% of oil is owned by
countries—Saudi Arabia, Venezuela, and Russia; gov.

PROVIDES basic essentials like housing and healthcare—the
healthcare bill is NOT government run healthcare

http://www.heritage.org/index/ranking.aspx
AMERICA—Market Based economy
with government intervention

Free Enterprise

Market Characteristics

Economic Freedom


Voluntary Exchange
Private Property

Profit Motive

Competition
AMERICA--Government

Protector

Consumer Product Safety Commission, FDA, USDA, OSHA

Protects private property—home and intellectual property

Provider

Public Goods, Safety Net—Social Security, Medicare, Medicaid,
Unemployment, Food Stamps

Regulator

bustin’ trusts: Sherman Anti-Trust Act (1890), Federal Trade Commission
Act (1914)

Public disclosure laws

Corrector

Corrects negative externalities by taxing or outlawing—pollution

Promotes positive externalities by subsidizing—education