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ECONOMICS CHAPTER 1What is Economics?
WHAT IS ECONOMICS? Economics-the study of
how people seek to satisfy their needs and wants by making choices.
Need-
Want-
Goods
services
SCARCITY AND SHORTAGES?
Scarcity-
FACTORS OF PRODUCTION
Land-
Labor-
Capital - Physical
human
OPPORTUNITY COSTAND TRADE-OFFS
Tradeoffs Opportunity cost
THE DECISION-MAKING GRID
Benefits • Enjoy more sleep• Have more energy during the day
• Better grade on test• Teacher and parental approval• Personal satisfaction
Decision • Sleep late • Wake up early to study for test
Opportunity cost • Extra study time • Extra sleep time
Benefits forgone • Better grade on test• Teacher and parental approval• Personal satisfaction
• Enjoy more sleep• Have more energy during the day
Sleep late Wake up early to study
Alternatives
Karen’s Decision-making Grid
THINKING AT THE MARGIN
Options
1st hour of extra study time
2nd hour of extra study time
3rd hour of extra study time
Benefit
Grade of C on test
Grade of B on test
Grade of B+ on test
Opportunity Cost
1 hour of sleep
2 hours ofsleep
3 hours of sleep
Watermelons (millions of tons)
Shoes(millions of pairs)
Sh
oe
s (
mil
lio
ns
of
pa
irs
)
25
20
15
10
5
0 252015105
Production Possibilities Graph
Watermelons (millions of tons)
0
a (0,15)
15
8 14b (8,14)
14
18
20
21
12
9
5
0
A productionpossibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
PRODUCTION POSSIBILITIES A production possibilities graph shows alternative ways that an economy
can use its resources.
Sh
oe
s (
mil
lio
ns
of
pa
irs
)
25
20
15
10
5
0 252015105
Watermelons (millions of tons)
Production Possibilities Graph
g (5,8)
A point of underutilization
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)b (8,14)
S
EFFICIENCY
Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently.
Sh
oe
s (
mil
lio
ns
of
pa
irs
)
25
20
15
10
5
0 252015105
Watermelons (millions of tons)
Production Possibilities Graph
T
Future productionPossibilities frontier
c (14,12)
d (18,9)
e (20,5)
f (21,0)
a (0,15)b (8,14)
S
GROWTH
Growth If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve “shifts to the right.”
Watermelons (millions of
tons)
Shoes(millions of
pairs)
Sh
oe
s (
mil
lio
ns
of
pa
irs
)
25
20
15
10
5
0 252015105
Production Possibilities Graph
Watermelons (millions of tons)
14
18
20
21
12
9
5
0
0 15
8 14
c (14,12)
d (18,9)
COST Cost: Switching production from one product to
another involves a loss of production for one item.
CHAPTER 2Answering the three economic questions
THE THREE ECONOMIC QUESTIONS
Every society must answer three questions:1. What goods and services should be produced? 2. How should these goods and services be
produced? 3. Who consumes these goods and services?
ECONOMIC GOALS
Economic Efficiency –
Economic Freedom –
Economic security –
Economic Equity –
Econ Growth –
An economic system is the method used by a society to produce and distribute goods and
services.
Traditional economies
Centrally planned economy
Market economy
Mixed economies
WHY DO MARKETS EXIST?
A market Specialization
monetary flow
physical flow
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households Firms
Product market
Factor market
Households pay firms for goods and services.
Firms supply households with goods and services.
Households supply firms with land, labor, and capital.
Firms pay households for land, labor, and capital.
THE FREE MARKET ECONOMY In a free market
economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services.
Invisible handSelf interestcompetition
THE INVISIBLE HAND OF THE FREE MARKET
Comes from the great philosopher Adam Smith (18th century)
Made up of two components
Self InterestCompetition
ADVANTAGES OF THE FREE MARKET
Efficiency Growth
Freedom Variety
CENTRALLY PLANNED ECONOMIES
Socialism = Communism=
THE FORMER SOVIET UNION
Soviet Agriculture Large farms called collectives
Soviet Industry Focus on military goods and heavy industry
Soviet Consumers Few available products but very cheap prices
PROBLEMS OF A CENTRALLY PLANNED ECONOMY
Centrally planned economies face problems of poor-quality goods,
shortages, and diminishing production.
monetary flow
physical flow
monetary flow
physical flow
Circular Flow Diagram of a Mixed Economy
Households Firms
Product market
Factor market
Government expendituresexpenditures
governm
ent-
owned facto
rstaxes
taxesgovern
ment
purchases
GOVERNMENT’S ROLE IN A MIXED ECONOMY
In a mixed economy, The government
purchases land, labor, and capital from households in the factor market, and
Purchases goods and services in the
product market.
Continuum of Mixed Economies
Centrally planned Free market
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Iran
North Korea
Cuba
China
Russia Greece Peru United States
South Africa France United Kingdom
Botswana Canada Singapore
Hong Kong
COMPARING MIXED ECONOMIES An economic system that permits the conduct of business
with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations.
CHAPTER 2 OPEN NOTE QUIZ
1. List and describe the goals achieved/advantages of free markets.
2. Describe centrally planned economies.3. What are the three questions that each
society must answer?4. How does socialism differ from
communism?5. What type of economy does the U.S. have?
Why?6. What two factors help to keep free
markets regulated?7. What is the invisible hand?8. What is laissez faire?9. Why are most countries mixed economies?10. What is the primary role of government in
the United States economy?
CHAPTER 2 REVIEW 3 economic questions Centrally planned economies Free market economies Traditional economies Advantages of mixed
economies Advantages of free market
economies What happened to the major
centrally planned economies (China, Soviet Union
Continuum of Mixed economies (especially Canada, U.S. China)
Economic Goals Efficiency Growth Freedom Additional goals (varies)
Invisible hand Self interest Competition Why are most
countries mixed Adam Smith
CHAPTER 3American Free Enterprise
FREE ENTERPRISE Free Enterprise -
BASIC PRINCIPLES OF FREE ENTERPRISE
Profit motive-
Open opportunity-
ECONOMIC RIGHTS
Legal Equality-
Private property-
Free contracts-
Voluntary exchange-
Competition-
WHAT SHOULD GOVERNMENT DO?
Protect Consumers Public Disclosure laws- Protecting Health and Safety-
PROVIDING A SAFETY NET
The Poverty Problem-
Poverty threshold- level of income below what is needed to support families or households. In 2000 a single parent under 65 was $11,869 and a four person family was $17,463.
Government Role-
Yet as a society that prefers limited government activity in the economy, poverty poses tough questions:
A. What can government do to combat poverty? B. What should government do?