Basic Economic Concepts

Lecture Notes

Wants v. Needs

• Needs:– Those goods and services that are necessary for

survival – Food, clothing, and shelter

• Wants: those goods and services that people consume beyond what is necessary for survival.

• Problem: People have unlimited wants and needs!

• Complete your own Wants v. Needs chart –warm up

Vocabulary Week 1

• Scarcity: – The basic economic problem that arises

because people have unlimited wants but resources are limited

• Resources: – An economic or productive factor required to

accomplish an activity

Definition to add to vocabulary• Opportunity Cost: – The value of the NEXT BEST alternative (essentially,

the value of the second best choice)

– Examples• If you use the kayak paddle for firewood, you

cannot use it as a fishing pole.• If you use the drinking water collected from the

rain for taking a shower, you cannot use it to satisfy your thirst.

Vocabulary

• Alternatives: One of many different actions that we might take in a given situation.

• Choices: The course of action we take when faced with a set of alternatives.

Vocabulary:

• Market Economy: an economy that relies chiefly on market forces to allocate goods and resources and to determine prices

• Command Economy: an economy in which production, investment, prices, and incomes are determined centrally by a government.

Review –Friday

• Utility• Trade• Efficiency• Opportunity cost• Scarcity

• Choices• Alternatives• Costs• Benefits• Command Economy• Market Economy

Vocabulary: – Trade: a free exchange of goods or services

– Utility: a measure of happiness or satisfaction

– Efficiency: society getting the most it can from its scarce resources

Today you will have the opportunity to participate in a trading activity, to explore why people trade.

Guide to Economic Reasoning

1. People choose. People choose the alternative that seems best to them because it involves the least cost and the greatest benefit. People economize.

2. People’s choices involve costs – monetary costs and opportunity costs. Opportunity cost is the value of the second-best alternative that people give up when making a choice.

3. People respond to incentives in predictable ways. Incentives are benefits or rewards that encourage people to act. When incentives change, people’s choices change.

4. People create economic systems, and these systems influence incentives and people’s choices. How people cooperate is governed by written and unwritten rules. As rules change, incentives change and choices change.

5. People gain when they trade voluntarily. People can produce more in less time by concentrating on what they do best. The surplus goods or services they produce can be traded for other valuable goods or services.

6. People’s choices have consequences that lie in the future. The important costs and benefits in economic decisions are those that will appear in the future. Economics stresses the importance of making choices about the future. People cannot choose to change the past.

Rules a Incentives a Choices

• What is the relationship among choices, incentives, and rules?

All countries establish rules for their economies, and these rules influence economic behavior. Some rules encourage people to use resources and exchange goods and services. Some rules discourage people from using resources and exchanging goods and services.

Public Policy

• Governments put in place public policies to help achieve their broad social goals. – Some policies may help with certain goals, and reduce the ability to

help with others.

• Individuals and societies must face tradeoffs when trying to achieve more than one goal by giving up something that promotes one goal to get more of something that promotes another goal.

• What tradeoffs among goals were made in your students’ economies?

Production Possibilities

• Economists take into account alternative ways for utilizing scarce resources. – The more you produce of one product, the less you will

produce of another.

• Efficiency: an economy is using resources in such a way as to maximize the production of goods and services.

• Trade-off: giving up something that promotes one goal to get more of something that promotes another goal.

Production Possibilities Frontier

• The line on the graph that shows the maximum possible production. – Anything below the

frontier is considered to be underutilization because fewer resources are being used than capable.

Roles in the economy

• People participate in the economy in many different ways. – Consumers: buying goods/services– Producers: provide resources to businesses – Citizens: voting on economic policy

• “The Invisible Hand” – A natural phenomenon that guides free markets and

capitalism through competition for scarce resources.

Vocabulary: Factors of Production

• Human Resources (Labor): the number of people available for work.

• Natural Resource (land): land that can be used for production.

• Capital: manufactured or constructed items that businesses use in the production process.

Circular Flow Model

• How are households and businesses interdependent?

• How does the circular flow model relate to Econoland?

• Complete the questions in Activity 10.5 using the circular flow model and what you learned from the simulation.