THE Economic System
Capitalism, Socialism &
Communism
{
Liberty or Equality?


Economics is the study of how people make choices to
(1)satisfy their wants
For example:


You must choose how to spend your time
Businesses must choose how many people to hire
What Is Economics?
Which is more important:
Liberty or Equality?
What is Liberty?
-NEEDS AND (2)WHAT YOU MUST HAVE TO SURVIVE

What is Equality?
- WANTS OR (2)THINGS PEOPLE CAN DO WITHOUT
BUT BELIEVE IS NECESSARY


Scarcity occurs when there are
limited quantities of resources
to meet unlimited needs or
desires ( Always)

Shortages occur when
producers will not or cannot
offer goods or services at
current prices ( Sometimes)
Scarcity and Shortages
(4)Land All natural resources that are used to
produce goods and services.
 (4)Labor Any effort a person devotes to a task for
which that person is paid.
 (4)Capital Any human-made resource that is used
to create other goods and services.

The Factors of Production
(3)WHAT?-what are you going to make
(3)HOW?- how do you make it
(3)WHO(M)?-who is going to buy?
(5)How and why you make goods
EVERYTHING IN THE USA IS BASED UPON THESE IDEAS
PRODUCTION FACTORS
SCARCITY VS. SHORTAGE
LIBERTY VS. EQUAILTY
-WHY THINGS COST AS MUCH AS THEY DO???

-IS IT THE JOB OF BUSINESS IN THE USA TO HELP PEOPLE OR
TO MAKE MONEY???
-IT’S ALL CONNECTED!!!
WHO CARES AND SO WHAT
Goods and
Services

People help the economy
by purchasing “goods” and
“services.”
Goods are (6)things that we
buy that we can use or touch.
Services are (7)jobs that workers do
for other people.
Producers and Consumers
Some people provide goods
and services, while (8)others
use goods and services.
{
Circular Flow Concepts
Product Market – where goods and services are exchanged
(9)Households – suppliers of the factors of production
& demanders of goods and services
(9)Government – providers of public goods and services &
demanders of both private goods and services
and the factors of production
(9)Businesses / Firms – suppliers of goods and services
& demanders of the factors of production
Factor Market – where the factors of production
are exchanged
Product Market
Households
<<<public
goods<<<
>>$ taxes $>>>
>>>factors of
production>>>
<<$ factor
payments $<<
<<<goods &
services<<<
>>$ government
spending $>>
>>>public
goods>>>
<<$ taxes $<<
Government
Factor Market
Businesses / Firms
Growth versus Productivity
• Economic growth may be one aspect of economic
development but is not the same
• Economic growth:
– (11)A measure of the value of output of goods and
services within a time period
• Productivity
– (10)A measure of the welfare of humans in a society
by bringing forth more goods
What are the factors that affect productivity?
Training
Technology
Methods
Management
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Specialization
“(12)Do what you do best; trade for the
rest”
• Attempting to produce
everything you want to
consume yourself limits both
your production and
consumption possibilities.
The opposite is Called :
(13)Independence :
trying to produce
everything yourself
Production Economics
• Managers must decide not only what to produce for
the market, but also how to produce it in the most
efficient or least cost manner.
• Economics offers widely accepted tools for judging
whether the production choices are least cost.
• A production function or economic product shows
(14)the most that can be produced from a given set
of inputs or resources.
2005 South-Western Publishing
Slide 16
• The Paradox of Value
» (15)Goods critical to life (such as water) are
very cheap, whereas others which have
no bearing on human existence (such
as diamonds) are very expensive.
» For centuries, philosophers have been puzzled by the
fact that water is vital for life but cheap while diamonds
are used only for decoration yet are very expensive.
» You can solve this puzzle by distinguishing between
total use and marginal use.
» Total use tells us about relative value; marginal utility
tells us about relative price.
» (16) The cost it takes to train and maintain
any learning while improving the value, and
price of an economy is our Human capital
Slide 17
All Factors OF The Econ Circle Cost(s)
All-factors
measure
Goods or Services produced
All inputs used to produce them
If we produce only one product, the top number can be
either the total units of product or total $ value of the
product.
If we produce several products, the numerator is the total
$ value of all products.
Usually, the numerator is the total $ value of all outputs.
The bottom number is total $ value of all inputs.
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Example: Single Factor Productivity
10,000 Units Produced
Sold for $10/unit
500 labor hours
Labor rate: $9/hr
What is the
labor productivity?
19
Example (1.)
10,000 Units Produced
Cost of raw material: $30,000
Sold for $10/unit
Overhead: $15,500
500 labor hours
Labor rate: $9/hr
AFP = 2.0
AFP =
Output ( what you make)
Labor + Materials + Overhead (costs)
(10,000 units) * ($10)
AFP =
(500)*($9) + ($30,000) + ($15,500)
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Who Cares and So What
• Everything is connected
• Decisions by one affects decisions of
another
• You will make most financial decisions
usually based off of one factor of
production or growth
Macro & Micro Economics
BIG and small
(17)Macro- study of large scale money
factors on a national or worldwide level
(17)Micro- study of individual money
decisions on a more personal level
Macroeconomics vs. Microeconomics
To understand the scope and sweep of macroeconomics, let’s begin by
23
looking
more carefully at the difference between microeconomic and
macroeconomic questions.
#18 -MICROECONOMIC
QUESTION(s)
Go to business school or take
a job?
What determines the salary
offered by Citibank to a new
UTC grad?
#18-MACROECONOMIC
QUESTION(s)
How many people are
employed in the economy as a
whole?
What determines the overall
salary levels paid to workers
in a given year?
Macroeconomics vs. Microeconomics
MICROECONOMIC
QUESTION
What determines the cost to a
university or college of offering
a new course?
What government policies
should be adopted to make it
easier for low-income students
to attend college?
What determines whether
Citibank opens a new office in
Shanghai?
MACROECONOMIC
QUESTION
What determines the overall
level of prices in the economy
as a whole?
What government policies
should be adopted to promote
full employment and growth in
the economy as a whole?
What determines the overall
trade in goods, services and
financial assets between the
US and the rest of the world?
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Four Principal Ways that Macroeconomics
Differs from Microeconomics:
1.In macroeconomics, the behavior of the whole
macro economy is, indeed, (19)greater than the
individual actions and market outcomes.
2.Macroeconomics is widely viewed as providing a
rationale for continual (19)government intervention to
manage short-term fluctuations and adverse events in
the economy.
 monetary policy
 fiscal policy
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Four Principal Ways that Macroeconomics
Differs from Microeconomics (cont.):
3.Macroeconomics is the study of (19)long-run growth:
What factors lead to a higher long-run growth rate?
And are there government policies capable of
increasing the long-run growth rate?
4.The theory and policy implementation focus on
(19)economic shifts -- economic measures that
summarize data across many different markets for
goods, services, workers, and assets.
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Consider this….


When one person saves, that person’s wealth is
increased, meaning that he or she can consume more
in the future. But when everyone saves, everyone’s
income falls, meaning that everyone must consume
less today.
“Paradox of Thrift”- (20)success for
microeconomics doesn’t always mean success for
macroeconomics. Just because the small does well
doesn’t mean the big does well
WHO CARES AND SO WHAT??
Consider this….
Explain why there is usually less government
interference in microeconomics than in
macroeconomics.
IN your answer(s) to your readings be sure to
use at least one of the 4 differences to
explain your answer
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Capitalism
Maximizes liberty
 Adam Smith – 1776 – “The Wealth of Nations”
 “Free Enterprise” – everyone is free to pursue
any economic activity
 Laissez-Faire – do not interfere in the economy
 Freedom to succeed and freedom to fail
 Private ownership of capital (means of
production)
