Fundamental Economic Concepts

Imagine that off campus lunch passes are very scarce and thus only 50 students will be
granted off campus lunch privileges. Evaluate the costs and benefits of using each of the
following methods of allocating (distributing) off campus lunch passes:
Allocation Method
Benefits (What will be
gained? Consider
individual benefits as well
as benefits to the school.)
Appearance and Personality
Costs (What will be given
up or sacrificed?
Consider individual costs
as well as costs to the
Market (Passes will be
auctioned. Buyers willing to pay
the highest price will receive the
First Come First Serve
(Passes will be handed out to
the first 50 students in line on
the first Monday in August each
(Fight for it)
(Student Council Members
Which of the five allocation (distribution) methods listed above would most likely be
preferred by each person?
1. Judy is a close friend of four student council members. ______________________
2. Jimbo is an active boxer and has had extensive training in Karate. ______________
3. June’s parents are billionaires and big spenders. ____________________________
4. Jack spends his entire summer watching television and he does not have a summer
job. __________________
5. Jill and Jackson are models for several major clothing designers. ______________
6. Which method would provide the strongest incentive to provide more off campus
lunch passes? Defend your answer. _____________________________________
Economic Systems
Market Economy - an economy that relies chiefly on market forces to allocate goods
and resources and to determine prices. (Capitalism / Free Enterprise) Economic
incentives exist that encourage risk-taking, production, and profit seeking. Competition is
intense. Government plays a limited role. For example, the government protects property
rights, regulates businesses, and preserves competition by preventing monopolies.
Command Economy – an economic system that relies on centralized decisions to
determine what goods will be produced and how those goods will be allocated. There
are few incentives to take business risks and there is no economic freedom. Usually the
government makes the major economic decisions.
Traditional Economy – economic decisions are made based on habit, ritual, and
custom. There are few incentives to innovate and creativity may be viewed as a threat.
Fundamental Economic Concepts
Factors of Production – land, labor, capital and entrepreneurship
- land – natural resources used to produce goods and services.
- labor – workers who produce goods or offer services
- capital – tools, machines, equipment used to produce goods and services
- entrepreneurship – individuals who take risks and organize the other factors of
production into potentially profitable enterprises.
Scarcity – the fundamental economic problem faced by all economic systems. This
problem exists because we have unlimited wants and needs but limited resources to
satisfy those wants and needs.
Three Big Questions – because of scarcity, all economic systems must ask and answer
the Three Big Questions. 1) What will be produced? 2) How will it be produced? 3) Who
gets the goods and services that are produced? The way these three questions are
answered determines the type of economic system in place.
Trade Offs and Opportunity Cost
Opportunity Cost – The cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, the benefits you could have received by taking an
alternative action. For example: If you are offered a full time position with Shell Oil and a
full time position with Boeing and you chose to accept the job with Shell, your
opportunity cost would be the job with Boeing. Opportunity cost is the next best
alternative. The job with Boeing was the next best alternative.
Trade Offs – all alternatives within a set of alternatives that were not selected. If you
accepted the job with Shell but were offered jobs with Boeing, Valero, IBM, and Exxon,
the jobs with Boeing, Valero, IBM, and Exxon are all trade-offs.