Economics
Introduction:
Chapter 18
What economics is not?
• Economics is not about money.
• What is money?
• Where does it come from?
Economics
• Economics: the study of how people choose to use resources.
• It is the study of choices.
• What are your resources?
• Examples: physical power, time, money, property…
• Economics is not a science.
• It is a set of theories, but none, has scientific validity.
• Since it is about human choices, there is no scientific standard.
• Why is this important for creating economic policy in
government?
The Problem
• Why would we need to devote a study to
choice?
• Consider WANTS and NEEDS
The Problem
• Economics exists due to scarcity.
• Scarcity: lack of resources
• Also: the fundamental economic problem of having seemingly unlimited
human wants and needs in a world of limited resources. It states that
society has insufficient resources to fill all human wants and needs.
• Economics is the study of how we choose to use those limited
resources.
• Many types of resources and choices to be made.
• Economists use economic models to predict how we will make
choices. (Economic Model: representations of the “real world” that
are used to influence decisions, explain how decisions are made, and
predict economic change.)
Making Economic Decisions
• Trade Offs: the alternative you face of you decide to do one
thing rather than another. (the situation in which there is a
gain in one area and a loss in another)
• Opportunity Cost: the cost of the next best thing, use of time,
or resources when you choose to do one thing rather than
another. (the value of the choice made in the trade off)
THE METRO COOKIE?
COLLEGE?
Business Costs (Budgeting)
• Fixed Costs: costs or expenses that are the same no matter how
many units of a good you produce.
• Variable Costs: expenses that change with the number of products
produced
• Total Costs: fixed costs + variable costs = total costs
• Marginal Cost: the extra or additional cost of producing one
additional unit of output
• Marginal Benefit: the additional or extra benefit associated with an
action
• Cost-Benefit Analysis: Determine the costs and benefits of an
economic decision to determine if it is a logical choice.
Economics as civics
• Why do we study economics in a civics course?
• What is the effect of your individual economic
choices on the national economy?
• If you knew you could get away without paying taxes,
would you?
• What are the consequences if your choice was
representative of everybody else’s choice?
Market Economy
• Market Economy: system in which supply, demand,
and prices help people make decisions about how to
allocate their resources.
• Capitalism: private citizens own most of the means
of production.
• Free-Enterprise: little-to-no government interference
or regulation in the markets
Incentives
• Rewards that are offered to try to persuade people to
make certain decisions or actions.
• Credit Cards
• Buying in bulk
• Honor Role => Prizes
Determining Government’s
Role in economics
• Keep Competition- avoid monopolies
• Competition keeps businesses working efficiently, innovating, and
keeps prices fair for consumers.
• Provide essential services or services that the private sector
does not
• schools, welfare, justice, defense
• Regulation
• Sticks: penalties
• Examples: Rules (laws), taxes
• Carrots: incentives
• Examples: subsidies, tax breaks
Chapter 19
• Two Basic Forms of Production
1. Goods: Tangible Products
2. Services: performed works
• Factors of Production- Resources necessary to produce
goods and services
1. Natural Resources: naturally forming substances
2. Labor: human resources in form of physical and mental effort
3. Capital: money and “capital goods” (goods used in the
production of goods)
4. Entrepreneurship: creators, innovators, and risk takers
Economic Activity
Costs
Factor Market
- Households sell
- Businesses Buy
Service
Service
Costs
Businesses
G and S
- Buy resources
- Sell Products
Taxes
Revenue
Service
G and S
Government
Taxes
G and S
Goods
Money
Income
Costs
Product Market
- Businesses sell
- Households buy
Households
- Sell Resources
- Buy Products
Goods
Consumption
Expenditures
Market Economy
• Who controls the factors of production in our
economy?
• Is this a good system?
• Where does economic activity take place?
Markets
• Markets: a place where exchanges of resources takes
place
• At work, labor is sold in the “factor market.”
• At stores, goods are purchased in the “product market.”
• Who controls the markets?
Consumer Sovereignty
• Consumer sovereignty: the assertion that consumer
preference determine the production of goods and
services.
• “Consumer as king.”
• Examples:
• New Coke (1985)
• Crystal Pepsi
Freedom/Rights Required
• Economic Freedom: the politico-economic belief
that individuals should have the freedom to produce,
trade, and consume any goods and services acquired
without the use of force, fraud, or theft.
• Private Property Rights: freedom to use and dispose
of our property as we choose (as long as we don’t
interfere with another’s rights)
• Incentive?
Competition
• Why is competition in business good?
• Price?
• Quality?
• Creates happy consumers
• Competition rewards most efficient producers
• Those that can’t produce efficiently will go out of
business
• Those that do produce efficiently will make profit
Profit Motive
• The purpose and goal of any business is to make
profit. (for-profit business)
• Exception: non-profit business (what is their goal?)
• The ability to make gains or profits is what moves
businesses and individuals past risk.
• Profit = Revenue – Total Costs
1776
• What happened in 1776?
• Wealth of Nations by Adam Smith (Scottish)
• Used logic and reason to describe the benefits of Free
Enterprise or “Laissez-Faire” Economics
• “Free Hand” or “Let Do”
• Remove government from the economy and privatize
the market place
• Who read his works?