Fundamental Economic Fundamental Economic ConceptsConcepts

EconomicsEconomics

The study of meeting peoples unlimited The study of meeting peoples unlimited wants and needs with scarce resources. wants and needs with scarce resources.

EconomyEconomy

How a society chooses to allocate its How a society chooses to allocate its scarce resources to the unlimited wants of scarce resources to the unlimited wants of its people (there are many kinds of its people (there are many kinds of economies).economies).

How do we do this in the U.S.?How do we do this in the U.S.?

How is it done in Cuba?How is it done in Cuba?

Purpose of EconomicsPurpose of EconomicsGoal is to describe, Goal is to describe,

analyze, explain, analyze, explain, and and predictpredict economic activity.economic activity.

Biggest Economic Problem: Biggest Economic Problem: ScarcityScarcity

ALL RESOURCES ARE SCARCEALL RESOURCES ARE SCARCE

WE HAVE UNLIMITED WANTSWE HAVE UNLIMITED WANTS

There Is No Such Thing As A Free LunchThere Is No Such Thing As A Free Lunch

Factors of Production – The things Factors of Production – The things used to make other thingsused to make other things

1.1. Land Land (natural resources)(natural resources)

2.2. Labor Labor (human resources)(human resources)

3.3. Capital Capital (non natural resources)(non natural resources)

4. Entrepreneurs 4. Entrepreneurs

Pencil Factory Pencil Factory

Because of scarcity producers Because of scarcity producers must make choicesmust make choices

3 Basic Economic Questions3 Basic Economic Questions1.1. What to produce?What to produce?

2.2. How to produce?How to produce?

3.3. For whom to produce?For whom to produce?

Because of Scarcity Consumers Because of Scarcity Consumers Must Make ChoicesMust Make Choices

Trade Off: Alternative choiceTrade Off: Alternative choice

Opportunity Cost: The cost of the next Opportunity Cost: The cost of the next best alternative that was given up.best alternative that was given up.

Core Economic PrinciplesCore Economic Principles

1.1. Because of Scarcity People Must ChooseBecause of Scarcity People Must Choose

2.2. All Choices Involve CostsAll Choices Involve Costs

3.3. The Consequences/Rewards of Choices Lie in The Consequences/Rewards of Choices Lie in the Futurethe Future

4.4. People Respond to Incentives in Predictable People Respond to Incentives in Predictable WaysWays

Econ VocabEcon Vocab ProductivityProductivity

Measure of the amount of output produced with a set Measure of the amount of output produced with a set amount of F.O.P. (Factors of Production)amount of F.O.P. (Factors of Production)

SpecializationSpecialization Focusing on a specific task in order to be more Focusing on a specific task in order to be more

efficient.efficient.

Economic InterdependenceEconomic Interdependence Because of specialization, each economy depends on Because of specialization, each economy depends on

other economies.other economies.

More Econ VocabMore Econ Vocab ValueValue

Something has value if it can be expressed in terms Something has value if it can be expressed in terms of dollars and cents.of dollars and cents.

WealthWealth Something has wealth if it can be passed on to Something has wealth if it can be passed on to

someone else. (It must be desired)someone else. (It must be desired)

UtilityUtility The usefulness of something. (Does it have a high or The usefulness of something. (Does it have a high or

low utility?)low utility?)

LandLand LaborLabor CapitalCapital EntrepreneurEntrepreneur Opportunity Opportunity CostCost

ScarcityScarcity ValueValue UtilityUtility WealthWealth ProductivityProductivity

SpecializationSpecialization Economic Economic Interdepen- Interdepen- dencedence

TINSTAAFLTINSTAAFL ConsumerConsumer ProducerProducer

Factor Factor MarketMarket

Product Product MarketMarket

Paradox Paradox of Valueof Value

Trade OffTrade Off GoodsGoods

ServiceService Production Production Possibilities Possibilities FrontierFrontier

Circular Circular Flow of Flow of Econ. Econ. ActivityActivity

3 Basic 3 Basic Econ Econ QuestionsQuestions

EconomicsEconomics