What is Economics?What is Economics?

How Economic Systems WorkHow Economic Systems WorkEconomic ResourcesEconomic Resources

Capitalism and Free EnterpriseCapitalism and Free Enterprise

Economics IEconomics IThe Fundamental ProblemThe Fundamental Problem We do not have enough We do not have enough

resources to satisfy our resources to satisfy our wants and needs-wants and needs-SCARCITYSCARCITY

EconomicsEconomics is the study is the study of how we make of how we make decisions in a world decisions in a world where resources are where resources are limitedlimited

Scarcity forces us to Scarcity forces us to make decisions and make decisions and choose alternativeschoose alternatives

Economics IEconomics I

Three QuestionsThree QuestionsWHAT to Produce- make choices between WHAT to Produce- make choices between

wants and needswants and needsHOW to Produce- oil drilling in Alaska, HOW to Produce- oil drilling in Alaska,

factories and pollutionfactories and pollutionFOR WHOM to Produce- who gets what?FOR WHOM to Produce- who gets what?

Economics IEconomics IMaking Economic DecisionsMaking Economic Decisions Weigh the costs and benefits of an actionWeigh the costs and benefits of an action Think of the Think of the trade-offstrade-offs: buy a CD, get music, but lose : buy a CD, get music, but lose

money- is it worth it?money- is it worth it? Think of the Think of the opportunity costsopportunity costs: cost of the next best : cost of the next best

use of your timeuse of your time if you go to college for 4 years, that if you go to college for 4 years, that will cost you 4 years of full time workwill cost you 4 years of full time work

When considering the cost of a decision, think of When considering the cost of a decision, think of fixed fixed and variable costsand variable costs

Sometimes there are extra costs not considered when Sometimes there are extra costs not considered when the decisions was first made- the decisions was first made- Marginal CostsMarginal Costs cost of cost of producing one more unit of somethingproducing one more unit of something

Marginal RevenueMarginal Revenue: Extra revenue made from selling : Extra revenue made from selling one more unit of outputone more unit of output

Marginal BenefitMarginal Benefit: Extra benefit associated with an : Extra benefit associated with an actionaction

Economics IEconomics I

Cost-Benefit AnalysisCost-Benefit AnalysisCompare marginal cost and marginal Compare marginal cost and marginal

benefitbenefit

Economics IEconomics I

Becoming an Economically Smart CitizenBecoming an Economically Smart Citizen Understand how American economy worksUnderstand how American economy works

Market EconomyMarket Economy System of Supply and DemandSystem of Supply and Demand Based on Based on capitalismcapitalism- private citizens own means of - private citizens own means of

productionproduction Based on Based on free enterprisefree enterprise- businesses compete with - businesses compete with

little gov’t interactionlittle gov’t interaction Understand Understand IncentivesIncentives- rewards that influence - rewards that influence

behaviorbehavior Price/BonusesPrice/Bonuses

Economics IIEconomics IIEconomic ResourcesEconomic Resources American output is measured in goods (what we American output is measured in goods (what we

consume) and services (what we do for others)consume) and services (what we do for others)4 Factors of Production4 Factors of Production- resources necessary to produce - resources necessary to produce

goods and servicesgoods and services1. 1. Natural ResourcesNatural Resources2. 2. LaborLabor- nation’s labor force (human resources)- nation’s labor force (human resources)3. 3. CapitalCapital- money, tools, machinery to produce other - money, tools, machinery to produce other productsproducts4. 4. EntrepreneursEntrepreneurs- People who start businesses, invent - People who start businesses, invent new productsnew products

Economics IIEconomics IIGross Domestic ProductGross Domestic Product People measure economic success by their People measure economic success by their

incomesincomes The nation measures economic success by The nation measures economic success by

measuring how much (in dollars) all goods and measuring how much (in dollars) all goods and services cost in a yearservices cost in a year Gross Domestic Gross Domestic Product (GDP)Product (GDP)

GDP: Number of goods X Price of the good = GDP: Number of goods X Price of the good = ValueValue

Higher GDP is goodHigher GDP is goodStandard of LivingStandard of Living (quality of life)(quality of life)

Economics IIEconomics IIEconomic Activity and ProductivityEconomic Activity and Productivity There is a circular flow in a market (goods/services There is a circular flow in a market (goods/services

change hands)change hands)1. 1. The ConsumerThe Consumer- workers earn wages in exchange for - workers earn wages in exchange for laborlabor2. 2. Business SectorBusiness Sector- an person spends their income in - an person spends their income in the business sectorthe business sectorreceive payment in exchange for receive payment in exchange for productproduct3. 3. The Government SectorThe Government Sector- Government acts much - Government acts much like a businesslike a business4. 4. The Foreign SectorThe Foreign Sector- US buys and sells products - US buys and sells products from all nations from all nations

Economics IIEconomics IIProductivity and Economic GrowthProductivity and Economic Growth Economic growth occurs when total output of goods Economic growth occurs when total output of goods

grows over timegrows over time There are several factors that help boost economic There are several factors that help boost economic

growthgrowth1. 1. ProductivityProductivity When resources are used When resources are used

efficientlyefficiently2. 2. SpecializationSpecialization When certain markets focus When certain markets focus

on producing goods/services they can make better than on producing goods/services they can make better than anyone elseanyone else

3. 3. Division of LaborDivision of Labor Breaking down a job into Breaking down a job into smaller separate partssmaller separate parts

44. Human Capital. Human Capital investing time and effort investing time and effort into making your employees happyinto making your employees happy

5. 5. Economic InterdependenceEconomic Interdependence Willingly rely Willingly rely on others for helpon others for help

Economics IIIEconomics III

Capitalism and Free EnterpriseCapitalism and Free Enterprise US Economy based on private ownership of businessUS Economy based on private ownership of business

CapitalismCapitalism Free EnterpriseFree Enterprise when competition is encouraged and when competition is encouraged and

allowed to go on without gov’t interferenceallowed to go on without gov’t interference

Economics IIIEconomics IIIFeatures of CapitalismFeatures of Capitalism

11. Markets. Markets- places where the products and money are - places where the products and money are exchangedexchanged*Factor Markets*Factor Markets: where money is exchanged for labor: where money is exchanged for labor**Product MarketsProduct Markets: where goods/services are purchased: where goods/services are purchased2. 2. Economic FreedomEconomic Freedom- ability to make our own economic - ability to make our own economic choiceschoices3. 3. Private Property RightsPrivate Property Rights- ability to own/dispose our own - ability to own/dispose our own propertyproperty4. 4. CompetitionCompetition- struggle between buyers/sellers- struggle between buyers/sellers keeps keeps prices lowprices low5. 5. The Profit MotiveThe Profit Motive- Ppl. want profit (money left over) and - Ppl. want profit (money left over) and are willing to risk savings for more moneyare willing to risk savings for more money6. 6. Voluntary ExchangeVoluntary Exchange- when both the seller and buyer - when both the seller and buyer benefit from a transactionbenefit from a transaction

Economics IIIEconomics IIISpread of CapitalismSpread of Capitalism No one invented capitalism- grew over timeNo one invented capitalism- grew over time Two conceptsTwo concepts

Idea that people could work for economic gainIdea that people could work for economic gain Idea that government should have a limited role in the Idea that government should have a limited role in the

economyeconomy

Adam Smith- The Wealth of NationsAdam Smith- The Wealth of Nations Scottish economistScottish economist Scientifically described the basic principles of Scientifically described the basic principles of

economicseconomics Laissez- Faire EconomicsLaissez- Faire Economics- gov’t should not interfere - gov’t should not interfere

with economywith economy