Unit 1
Fundamental Economic
Concepts
Ch 1 – What is Economics?
Ch 2 – Economic Systems and Decision Making
Ch 3 – Business Organizations
Ch 1 – What is Economics?
• So why study • Virtually _________, + certainly every
economics?
_____, wants more than it can obtain.
B/c we have limited ___________ but
unlimited ____/_____, the problem of
_________ arises.
• ______________________________________
_________________
• Scarcity is the problem of not having
enough ____________ to meet our
limitless needs/wants.
• Economics is the study of how people
try to _____ their needs/wants w/
limited __________.
• Needs vs.
wants
• A need is a basic requirement for
___________.
• Includes ______, food, clothing, +
_______.
• A want is a way is a way of _________
a _______.
• Includes soda, juice, pizza, fries, a
leather jacket, pants 10 sizes too
big, a mansion, a yacht, etc…
• The 3 basic
economic
_________:
• B/c of scarcity, societies must deal w/
3 economic questions:
1. ________ to produce?
• Guns vs. butter
2. _______ to produce?
• __________ vs. _______
3. ___________ to produce?
• How to decide who gets
what (based on who can
_____ it, who needs it the
most, who ______ it, etc).
• There is no such thing as a ______
________! TINSTAAFL
• Everything ______ something.
A Production Possibilities Curve
Butter
1 pound 15 A
of butter
14
2 pounds
of butter 12
B
C
D
9
5
E
5 pounds
of butter
0
4
4 guns
7
3 guns
9
F
11 12 Guns
1 gun
Answering the Basic Economic Questions
What?
How?
For Whom?
______________
1. Sweden passes a law providing free medical care for all
citizens.
______________
2. Ford Corporation decides to reintroduce the convertible
automobile.
______________
3. All toys at the Toys-R-US factory are made by hand.
______________
4. General Motors replaces assembly-line workers with
robots at its Pontiac plant.
______________
5. A company decides to extend dental insurance to their
workers’ dependents
______________
6. South American farmers decided to start growing coffee
beans.
Unlimited Wants/Needs
fuels for transportation, electricity for home
appliances, home heating & cooling, fuels
for industrial machinery
Limited Resources
amount of coal, oil, and natural gas
capital
Create Economic Problem of Scarcity
higher prices for oil, gas, electricity, disruption of transportation
systems, power outages, heating shortages, cutbacks of industrial &
agricultural production.
Forcing People to make Choices
alternative energy sources, planned development, conservation,
rationing, suffering
WHAT to Produce HOW to Produce
For WHOM to Produce
solar power
Schools, hospitals, malls…..
hydropower
current & develop new
technology
• The 4 factors • The basic ________ required to produce
of production:
all _______ + __________.
• These are necessary in every ________:
Land – includes
all “________________”
land, water, natural
resources (like diamonds,
oil, iron, etc…)
Entrepreneurs –
someone who brings
together all of the other
factors + _________ them
to produce goods or
offer services
The Factors
of Production
They take
the ______ doing
something new +
aren’t considered
part of _____
Capital – ________
made resources (such as
buildings, equipment, tools,
machinery, services,
$, etc)
Labor – people
+ their __________
The only
factor that assists
in production + is a
________ of earlier
production
• What do
• _________ economic activity
economists (measuring GDP, ______________,
do?
inflation, gov.’t _________, etc).
• __________ economic activity (Why
are some prices _______ than others?
Why are some people ____ more than
others? How do taxes effect how much
people work + _______?).
• _____ economic activity (Communicate
issues to help societies understand
_________ + reach ______________).
• ______ economic activity (Will incomes
rise or fall? What happens if
___________ are taxed more instead of
homeowners? Is the economy
_____________?).
End Section 1
• Definitions
• Consumer goods – goods intended for final
use by ___________.
• Capital goods – goods used to __________
other goods/services.
• Ex. Ovens, cash registers, etc.
• Wealth – in an economic sense, it is the
accumulation of all __________ which are
_______, scarce, useful, + _________ from
one person to another.
• A nation’s wealth includes natural
resources, ________, stores, houses,
books, ____________, furniture, etc…
• _________ are not considered wealth,
but instead the _________ of wealth.
• Market – a location or other mechanism that
allows _______ + ________ to exchange a
certain economic product(s).
• Includes __________ markets.
• Division of labor or specialization –
assignment of _______ so that each
worker performs ____ functions more
____________.
•
___________
• Ex. Henry Ford’s ____________
• Economic interdependence – relying
on others to help ________ goods +
services we _________.
• Human capital is the sum of the skills,
_________, health, + __________ of
people.
• How can a nation
its human
capital?
Effect of Education
on Income (2003):
Education:
Average Income For:
Males
Females
Less than 9th grade
$ 25,112
$ 18,227
9th to 12th grade (No diploma)
$ 30,656
$ 23,625
High school graduate
$ 39,017
$ 27,525
Some college (No degree)
$ 46,696
$ 33,002
Associate Degree
$ 48,153
$ 34,560
Bachelor’s Degree
$ 71,361
$ 45,778
Master’s Degree
$ 87,099
$ 57,874
Professional Degree
$ 130,764
$ 72,689
Doctorate Degree
$ 104,237
$ 70,302
End Section 2
• Trade-offs
• Alternate _______ which must be given up
when one is chosen rather than another.
• Ex. You have $100. If you buy
concert tickets w/ the money, the
trade-off isn’t $100, but a new pair of
sneakers, an i-phone, or anything else
you could have used that $100 for.
• It’s what you are _____________.
• Opportunity
cost
• The cost of the __________ alternative use
of $, time, or resources when one choice is
made instead of another.
• Ex. If you use gas instead of solar
energy, it’s not just the gas you’re
burning but the pollution to the
environment as well.
• It’s the ___________, but not just in $.
Increasing Opportunity Cost
• Production
possibility
frontier
• A diagram representing various
____________ of goods +/or services
an economy can produce when all
productive resources are _______
___________.
• It shows that:
• There is a _____ to what you can
__________ given existing
institutions, resources, +
_____________.
• Every ______ has an opportunity
cost – you can get more of
something only by ___________
something else.
• All points on and below the production curve are ___________.
• At points A + B all resources are fully employed + ___________
________ is achieved.
• Point C, while possible, is an ___________ option.
• Point D is not a __________ option given current technology,
resources, + labor force.
• Economic
growth
• Can occur due to various factors such
as __________ growth, technology is
__________, more resources are
___________, etc…
Production
Economic
The
economy
growth
is initially
can results
now
at point
in
an(20
produce
A
outward
fishmore
and
shift
of
25of
everything.
coconuts),
the PPF

it can production
move to point E (25
because
possibilities
fish
and 30 coconuts).
are expanded.
End Section 3
Ch 2 – Economic Systems and
Decision Making
• Economic
systems
• An economy or economic system is
an _____________________ for the
wants + needs of a society’s people.
• The way in which a society ________
the 3 economic questions (What,
How, + For whom?) determines what
type of economic system it has
(traditional, ________, or command)
• Traditional
economies
• In these societies, the allocation of _________
resources, + nearly all other economic activity,
comes from ______, habit, or custom. Habit +
custom also dictate most social ___________.
• _______ answers the What, How, + For Whom
to produce. So individuals are not ___ to make
decisions based on what they want or would
like to have. Their roles are _________ by the
customs of their __________.
• Ex. the _____ of Canada, the ___________ of
Australia, + the Mbuti of Africa.
• Advantages: everyone knows their _______ in
society + little ____________ exists over what,
how, or for whom to produce, + usually _____.
• Disadvantages: discourages new ____ + ways
of doing things, strict rules of society ________
those who act differently or break the rules, +
lack of _________ leads to a lower standard of
living than in other economic systems.
• Command
economies
• In these societies, a _____________ makes
most of the economic decisions + the people
have little, if any, _________.
• The _______ answers the What, How, + For
Whom to produce. Individuals are not ___ to
make decisions based on what they want to
have + their roles are defined by the _____.
• Ex. North Korea, Cuba, the former USSR.
• Advantages: it can change drastically in a
relatively _________ + many health + other
public services are provided for everyone at
little or no ____ (although quality may not be
_______).
• Disadvantages: not ________ to meet the
wants of consumers, no _______ for people
to work hard, requires a large decisionmaking _______________, doesn’t have the
_________ to deal w/ minor day-to-day
problems, + new _______ are discouraged.
• Market
economies
• In these societies, _____ + ____ act in their
own best interests. Buyers + sellers come
together to __________ goods + services.
• _________ + _________ answer the What,
How, + For Whom to produce.
• Includes the largest + most _____________
economies in the world. Ex. The US, Japan,
South Korea, Britain, Germany, etc…
• Advantages: can adjust to _____ over time,
high degree of individual _______, relatively
small degree of gov.’t interference, decision
making is ___________ (we all have a say),
wide _______ of goods + services, + a high
degree of consumer _____________.
• Disadvantages: doesn’t provide for the ____
needs of everyone in the society, doesn’t
provide enough of the goods + services that
people value ____, relatively high degree of
___________ workers + businesses face, +
must guard against market failures. End Section 1
• Economic +
social goals
• Economic ________ – the freedom to make your
own economic _______ (where to work, what to
buy, whom to hire, what to produce, etc)
• Economic _______ – to use resources wisely to
produce as many goods + services as ________
• Economic ______ – economic fairness (such as
truth in ___________, equal pay for equal work,
no discrimination when hiring, etc)
• Economic ________ – protection from adverse
economic events like lay-offs, flooding, etc (ex.
social security, ______________________,
Medicare, etc)
• Full ______________
• Price ________ – protection against _________
(particularly difficult for people living on a fixed
income – an income that does not _______ even
when prices do)
• Economic growth – a sustained period during
which a nation’s total _____ of goods + services
___________
• When goals
_________
• Ex. Supporters of a ________________
believe it increases economic equity;
however, the opposition believes it goes
against the _______________ of
employers to set wages. In addition,
employers would be able to employ ____
people +/or may have to cut employee
______.
• A _________ analysis involves looking at
both sides + deciding which side results in
greater ________ +/or has a lesser ____.
• Other examples: ______ that help people
sell goods w/in the country, but harm the
sale of ________ (full employment vs.
economic growth), a company lays off
workers + starts using machines (full
employment vs. economic ___________),
etc…
End Section 2
• Capitalism +
• A market economy is normally based on
free enterprise
capitalism – a system where private ______
own the factors of production. In a free
enterprise, _________ is allowed to flourish
w/ a minimum of gov.’t ____________.
Characteristics
of Capitalism +
Free Enterprise
Economic
Freedom –
people choose
their ____ + how
to spend their $
+ businesses
choose what to
sell + how much
to ________.
Voluntary
Exchange –
buyers +
sellers may
______ engage
in market
_____________.
Private Property
Rights – people
may control their
___________ as
they wish.
(Includes both
tangible items
+ skills/talents.)
______ Motive –
people +
organizations
are encouraged
to improve their
__________
well-being.
(Often involves
taking ______.)
Competition –
Producers +
sellers ________
w/ one another
to attract
consumers while
lowering ______
+ consumers
compete w/ one
another to
obtain the _____
products at the
lowest prices.
• The different
• Entrepreneur – __________ + manages the
roles in a free
land, capital, + labor to seek a _____. They
enterprise society are the ones who take _______ to start up
businesses.
• Many _____, but when they succeed
more ___ are created, more products
are available for consumers, + the
gov.’t collects more ______ to provide
more _________.
• Others may try to follow their example
which leads to more _____________.
• Consumer – they ultimately determine
which products are _________. Every time
they make a _________ they “vote” for it. If
enough people don’t “vote” for a product, it
is no longer produced. (“The customer is
always ________.”)
• Gov.’t – (national, state, or local) gets involved in
the economy b/c people ______ it to. It has many
jobs w/in the economy:
• __________ – protects property rights +
enforces ______ against false advertising,
unsafe food + drugs, environmental hazards,
worker ______________, etc…
• Provider + __________ – provides services
such as national defense, ____________,
transportation, etc… To create, it must also
__________ goods as well.
• __________ – preserves __________ in the
market, oversees interstate + foreign _____,
makes zoning laws, sets __________, etc…
• Promoter of _____________ – economic
freedom, economic efficiency, economic
equity, economic security, full employment,
price stability, + economic growth. So it
created Social Security, _______________,
________ labor laws, etc…
• Mixed
________
• B/c the US has some elements of
tradition, + b/c the _____ is involved in
the economy on a ________ basis, it’s
said to have a mixed economy, one in
which people carry on their economic
affairs freely, but are subject to some
gov.’t intervention + ___________.
• There is no such thing as a pure
______ or pure _________ economy.
End Section 3
Ch 3 – Business Organizations
• Proprietorship • A business owned + run by _____________.
or Sole
• Most _________ form of business in the US.
Proprietorship • Most ________type of business organization.
• Advantages:
• Easiest to ___________.
• Easiest to manage (1 person can
quickly make __________).
• 1 owner gets to enjoy all of the ______.
• No separate business _____________
(taxed w/ personal income).
• _____________ satisfaction – be your
own _______.
• Easiest to _____________.
• Disadvantages:
• Owner has unlimited liability (he/she is fully
responsible for all of the business’s _______).
• If a business goes into debt, the owner’s
personal possessions may be ___________ to
pay off business debts.
• Difficulty in raising the __________ capital.
• Size + __________ (may need a minimum
inventory – stock of goods + parts in reserve to keep the business __________________).
• The proprietor often has limited managerial
______________.
• Difficulty of attracting __________ employees
(often need them to be qualified in ________
areas + potential employees are usually
attracted to bigger businesses that can offer
more _______).
• Limited life – the business ceases to exist
when the owner __________________.
• Partnership
•
•
•
•
A business jointly owned by __________ people.
___________numerous form of business.
2nd most _______ type of business organization.
In a general partnership all partners are
responsible for the _____________ + financial
____________ of the business. In a limited
partnership at least 1 partner is not _____ in the
daily running of the business but may have
___________ $ to finance the business.
• Easy to start up, but usually the partners draw
up _____________ called articles of partnership
which state how profits + losses will be _______
(may not be _______). Also describes what will
happen if a partner _____ or if a new one _____.
• Especially important b/c they can be held
financially ____________ for the business
________ of their partners.
• Advantages:
• Ease of _______________.
• Ease of _____________ (partners usually
bring different areas of _________).
• No separate business _____________.
• Can usually attract ______________ more
easily than proprietorships.
• Slightly more _______ than proprietorships.
• Easier to attract _____________________.
• Disadvantages:
• Partners are __________ for the acts of the
other partners.
• __________ life.
• Potential for __________ b/w partners.
• Corporations
• A form of business recognized by law as
a separate ____________ having all the
rights of an ___________.
• Gives it the right to buy + sell
________, enter __________, + to
sue/be sued.
• To incorporate (form a _____________)
people must get permission from the
______. Shares of stock (certificates of
ownership) are then sold to stockholders
(or shareholders) who “______” the firm.
• If the firm is ___________, stockholders
receive dividends (checks representing
a percentage of the firm’s profits).
• Some states offer ___________ like tax
credits to encourage firms to come to
their state which creates _______.
• Advantages:
• Ease of raising ________________ (sell
additional stock to investors).
• Can hire ____________________ to run the
firm.
• So the stockholders don’t have to
_________________ about the firm.
• Limited _______ – the corporation, NOT the
stockholders, is fully responsible for its
_________.
• Unlimited life – continues after __________
changes.
• Disadvantages:
• Difficulty + expense of getting a _________.
• The owners (stockholders) have little say in
how the business is _______.
• Double ______ (1st as corporate profit + 2nd
as personal income).
• Subject to more gov.’t _________. End Section 1
• Business
________
• 2 ways for businesses to grow:
1. Reinvestment – to use _____ to
expand/improve a business.
Allows firms to _________ more
goods +/or produce goods more
___________.
- Ex. Renovate a ________,
buy new machines, train
employees in new
____________, etc…
2. Merger – ___________ 2 or more businesses
into a single firm. One firm gives up its
separate _________________.
- Ex. AT&T & Cingular & cable
- Why merge?
- To _____ faster, to become more
efficient, to acquire a new
product, to eliminate a _____, to
change an ________, etc…
- 2 types of mergers:
1. Horizontal merger – 2 firms
that produce the __________ of
product.
2. Vertical merger – 2 firms that
produce goods at 2 or more
______________ of production.
Ex. Automaker + tire company,
or an ice cream company + a
dairy farm, etc…
• Conglomerates
• A firm that has at least ____________ that
each make __________ products, none of
which make up a majority of its _______.
• The idea is to _____ “putting all your eggs
in one basket”. That way, if there is a
__________ in a particular segment of the
economy, the entire corporation won’t
_________.
Percentage of
sales for
businesses in a
conglomerate
producing:
Furniture 35%
Shoes 20%
Candles 15%
Baseballs 10%
Chocolates 20%
• Multinationals
• ___________ that make goods +/or provide
services in different _____________.
• Subject to the ______ of all the countries it
operates in.
• Must pay _______ in all the countries it
operates in.
• Able to move resources, goods, services, +
$ across __________________.
• Can also be _______________.
• Can be ___________ b/c they transfer new
technology, create new ___, generate more
tax $.
• Can be ___________ b/c they may pay low
wages to workers, export ________ natural
resources, +/or interfere w/ the development
of ________ businesses.
End Section 2
• Nonprofit
• An organization that operates in a
organizations
____________ way to promote the collective
interests of its members instead of trying to
make a _______ for its owners.
• Ex: Community + civic organizations, co-ops, labor
unions, professional + business associations, +
gov.’ts.
• Community + • Ex. _________, churches, hospitals, welfare
groups, etc…
civic
organizations • They don’t issue stocks or pay ___________.
• They provide goods + services, but instead of
trying to make a _____, pursue another more
__________ goal. However, the workers for
these organizations are often _______.
• These organizations may take in more $ than
they spend, but they use the extra $ to further
their ________.
• Cooperatives
or co-ops
• A type of nonprofit organization where a
_______ association of people form to carry
on some kind of economic activity that will
benefit ________________.
• 3 types:
• __________ – buys goods in _____ to
offer discounts to members (members
usually contribute some of their own
________ to make it successful).
• _________ – provides ________ to its
members (instead of goods) at better
rates than they could get from a _____
organization.
• ex. credit union, babysitting, etc
• ________ – helps members promote
+/or sell their ________ (like farmers).
• Labor,
professional,
+ business
organizations
• These groups work to _______________________ of its
members.
• A labor union is an organization of _________ formed to
represent its members’ interests in __________ matters.
• They use collective bargaining (it negotiates w/
management on behalf of its _____________) to
improve pay, _______________, hours, benefits,
etc…
• They may also pressure the gov.’t to __________
beneficial to their members.
• A professional association is a group of people in a
___________ occupation that works to improve working
conditions, skill levels, + public perception of the
profession. They also seek to ________ gov.’t policy on
__________ important to them.
• Ex. American Medical Association, American Bar
Association, etc…
• A business association is when several or more
businesses _______________ to promote their interests.
• Ex. The Better Business Bureau – sponsored by
local businesses to provide general information
on companies.
• The gov.’t
• ________roles in the economy: produces +
provides goods + services to consumers.
• Ex. at the national level include the
postal service, FDIC, TVA, etc…
• “______” go back into the agency, but
_________ are covered by Congress.
• Ex. at the state/local level include
schools, police, rescue services, etc…
• _____ roles: acts as an “______” to prevent
monopolies from forming + charging
unreasonable rates. Also grants $ to people
for various reasons (social security, college
financial aid, ______________, etc).
End Section 3