Unit 1: Fundamentals of 3) Capital – all the resources made

and used by people to produce &

Economics Notes distribute goods and services
 Physical capital includes: tools,
Economics: Problem of Scarcity machinery, factories, roads, air-
planes, offices, warehouses
Economics – study of how people & soci-  Human capital – knowledge,
eties choose to use limited resources to sat- education, training, skills & spe-
isfy their needs & unlimited wants cialized talents of people
 #1 ongoing problem that all economists  Financial capital - money, used
face is SCARCITY!!!!!!!!!!!! by entrepreneurs & businesses
 Needs are the basic survival necessities to buy what they need to pro-
such as water, food, shelter, & clothing duce their goods or services
 Wants are UNLIMITED desires that 4) Entrepreneurship – combination of
can be satisfied by consuming or pur- vision, skill, ingenuity & willing-
chasing a good or service ness to take risks that is needed to
 People will always want more, but the create & run new businesses
resources available to satisfy them are  innovators, inventors, investors,
limited which causes SCARCITY! risk takers
 In order to be considered scarce, a good
or service must be (1) limited, (2) desir- Choices and Opportunity Cost
able, (3) have a cost  Incentives – benefits offered to encour-
 Scarcity affects which goods are made age people to act in certain ways (re-
and which services are provided wards or punishments)
 Goods are physical objects that can be  Ex: grades in school, wages paid to
purchased workers, trophies in sports, speeding
 Ex: food, clothing, furniture, elec- tickets, etc.
tronics, etc.  Utility – benefits or satisfaction gained
 Services are work that one person per- from the use of a good or service (happi-
forms for another for payment ness)
 Ex: sales clerk, tech support, teach-  People make decisions according to
ers, doctors, lawyers, lawn care, etc. what they believe is the best combina-
 Scarcity affects the choices of both the tion of costs & benefits
consumer (person who buys goods &
services for personal use) & the pro- “THERE IS NO SUCH THING AS
ducer (person who makes goods or pro- A FREE LUNCH!” (TINSTAAFL)
vides services
There’s ALWAYS a COST!
Productive Resources
 Every choice involves costs
Productive Resources – economic re-  Ex: Studying for a test or hanging
sources needed to produce goods and ser- out with friends; eating a salad or a
vices (Factors of Production) cheeseburger; going to college or
Acronym if it helps: CELL getting a job out of high school
1) Land – includes all the natural re-  The alternative that you give up when
sources found on or under the you make an economic choice is called a
ground that are used to produce trade-off
goods and services
 Individuals and Trade-Offs –
 water, forests, wildlife, miner-
als, oil studying one subject vs. another,
2) Labor – all the human time, effort college or work, watching TV or
& talent that go into the making of working out, etc.
products  Business Trade-Offs – producing
 workforce one item vs. another
  Society and Trade-Offs – “guns or
butter”, capital or consumer goods
 OPPORTUNITY COST of an
economic decision is the value of
the next-best alternative over
another
o #1 Tradeoff

Marginal Costs and Benefits

 The practice of examining the costs and
the expected benefits of a choice as an
aid to decision making is called cost-
benefit analysis
 Marginal cost is the cost of using one  PPC shows that nothing is free & ev-
erything has an opportunity cost, if
more unit of a good or service
society wants more of one thing it must
 Marginal benefit refers to the benefit give up something in return
or satisfaction received from using one  Efficiency – condition in which eco-
more unit of a good or service nomic resources are being used to pro-
 Analysis of marginal costs & benefits duce the maximum amount of goods &
helps explain the decisions consumers, services (on the curve – Full Employ-
producers, & governments make as they ment)
try to meet their unlimited wants with  Underutilization – condition in which
limited resources economic resources aren’t being used to
their full potential (inefficient; inside the
 Thinking at the margin – analyzing the
curve - Recession)
costs and benefits of incremental  Law of increasing opportunity costs
(small) decisions states that as production switches from
 If MB > MC then do it! one product to another, increasingly
 If MB < MC then it’s probably not the more resources are needed to increase
best choice to make the production of the second product,
 Law of Diminishing Marginal Utility which causes opportunity cost to rise
states that the marginal benefit from  Points A, B, C are all efficient, operat-
using each additional unit of a good or ing at Full Employment (on the line)
service during a given time-period tends  Point D is inefficient, showing the econ-
to decline as each is used omy is in a Recession (inside line)
 Point E is unattainable for long periods
of time (outside the line) and represents
Production Possibilities Curve (PPC)
an economy experiencing an inflation-
graph used to illustrate the impact of ary gap
scarcity on an economy by showing the
maximum number of goods or services that PPC can shift outward (economic growth)
can be produced using limited resources 1. Increase productive resources
(F.O.P: land, labor, capital)
 PPC is based on 4 assumptions: 2. New technology & efficiency
1. Resources are fixed 3. International Trade
2. All resources are fully employed
(economy is at full production)
3. Only 2 things can be produced
4. Technology is fixed
 Adam Smith and Capitalism  Economic System – method used by so-
 Adam Smith challenged mercantilism ciety to allocate/distribute the scarce re-
(economic system where the gov’t con- sources in order to bring goods and ser-
trolled trade & favored economic inde- vices to the people
pendence) & promoted the concept of  All economic systems must answer the 3
free trade in his book The Wealth of basic questions:
Nations (1776) 1) What to produce?
 Laissez-faire – economic policy of al- 2) How to produce?
lowing owners of industry to dictate 3) For whom to produce?
their prices and working conditions
without governmental interference 1) Traditional economy – relies on
(“allow to do”) habit, custom, or ritual to decide the
3 economic questions
Smith’s 3 natural laws of economics:  Developing Countries who are
1. Law of self-interest – people work poverty stricken countries
for their own good based on subsistence agriculture
2. Law of competition – competition  EX: African Mbuti, Australian
forces people to make a better prod-
uct for lower price Aborigines, $ Canadian Inuits
3. Law of supply and demand –
enough goods would be produced at 2) Market economy – economic deci-
the lowest price to meet the demand sions are made by buyers & sellers
in a market economy trading freely
 Invisible Hand establishes the price  CAPITALISM…$$$$!
and quantity of goods & services
produced without gov’t interference
 Advantages
Capitalism – economic system in which the 1. Ability to adjust to change based on
factors of production are privately owned consumer demand & producer sup-
and money is invested in business ventures ply
to make a profit 2. Ability to have a voice in the econ-
omy (“vote with our dollars”)
Fundamentals of Market Economies 3. High degree of individual freedom
1) Specialization – people concen- 4. Limited gov’t involvement
trate their efforts in the areas in 5. Variety of goods & services created
which they have an advantage; al- 6. High degree of consumer satisfac-
lowing people to trade with the most tion
efficiency
2) Division of Labor – separation of  Disadvantages
tasks so workers perform fewer 1. Inability of the market to meet every
tasks in order to operate more effi- person’s basic needs
ciently 2. Inadequate job of providing some
3) Productivity – increased amount of highly valued services like justice,
output (good or service) per unit of education, infrastructure, & health
labor input care (needed public goods)
 Increased productivity due to 3. Citizens may face a level of uncer-
technology advancements leads tainty & the prospect of economic
to economic growth risk, loss, & failure
 Capital investments allow in-
creased efficiency 3) Command Economies – in a cen-
4) Voluntary Exchange – act of buy- trally planned economy, the central
ers & sellers willingly & freely en- government decides how to answer
gaging in market transaction the three economic questions
where both parties benefit  SOCIALISM & COMMU-
NISM…uh oh!
Socialism – political & economic system in cial Welfare, Profit Earnings, & Po-
which the gov’t controls the means of pro- litical Freedoms
duction to distribute among the community 4. Gov’t is active in economy & pro-
as a whole to prevent economic & social vides support & direction
suffering
 Disadvantages
Communism – absolute socialism advocat- 1. It all depends on how “mixed” the
ing class warfare & leading to a society in economy is
which all property is publicly owned and 2. Big Gov’t policies (taxes, regula-
each person works & is paid according to tions, etc.) stifles economic growth
their abilities & needs (MARXISM) & becomes SOCIALISM in the end

Karl Marx is considered the father of the 5 Advantages of a Free Enterprise System
radical version of socialism known as Com- 1) Private Enterprise/Economic
munism after publishing his ideas in the Freedom – business or industry that
Communist Manifesto (1848) is managed by independent compa-
nies or private individuals rather
 Advantages than by the state (private ownership)
1. Ability to drastically change direc-  Patents - set of exclusive rights granted
tion in a relatively short period of by the gov’t to an inventor for a limited
time period of time in exchange for detailed
2. Little uncertainty for its citizens be- public disclosure of an invention
cause workers are forced into state
sponsored labor 2) Private Property Rights – Individ-
uals & businesses own property;
 Disadvantages have the right to buy and sell as
1. Citizen needs may not be met: star- much property as they want
vation, poor healthcare, lower stan-
dard of living, etc. 3) Competition – efforts among sell-
2. Consumer wants aren’t met since ers/producers to attract consumers at
consumer goods aren’t produced various prices
3. Hard work isn’t rewarded/no worker
incentives 4) Profit Motive – encourages people
4. Individual initiative goes unre- & organizations to improve their
warded (no incentives to produce) material well-being
5. Citizens have very few rights, lib-  Many people in our society are driven
erty, & freedoms by the desire to make money, which
6. Bureaucracy delays decisions that ultimately benefits the market
need to be made  People in the U.S. are rewarded for in-
7. Little flexibility to deal with day-to- novations & efficiency via cash IN-
day problems CENTIVES

4) Mixed Economies – market-based 5) Consumer sovereignty – desires &

economy in which government needs of consumers control the out-
plays a role in the market to help put of producers
with poverty, unemployment, public  Consumers are like “Kings” in a market
safety, health care, education, etc. economy
 Most modern economies are
mixed economies (U.S., Japan,
England)

 Advantages
1. People make their own decisions Gov’t’s Role in a Market Economy
2. Gov’t is still limited in scope
3. Provides freedoms & benefits: Free
Enterprise/Business Ownership, So-
Government acts an informer, protector, Externality – side effect of a transac-
provider, and regulator tion that affects someone other than the
 Government has the responsibility producer or buyer
to protect property rights, inform  Negative Externality – negative effects
the public and oversee business ac- experienced by people that had no part
tivities in the consumption of a good or service
 Ex: Cigarette smoker, chemical
1) Gov’t as Informer waste dumping, foreclosures &
 Make sure producers provide con- property values, etc.
sumers with full disclosure  Positive Externality – Goods/services
 Consumers use gov’t information to that generate benefits to many people,
protect themselves from dangerous not just those who pay for the goods
products & fraudulent claims  Ex: Education, better technology,
medicine, infrastructure, etc.
2) Gov’t as Protector  Subsidy – gov’t payment that helps
cover the cost of an economic activ-
 Federal government acts to preserve
ity that’s considered to be in the
competition, regulates airlines, com-
public’s best interest
munications, banking, stock markets
etc.
 Gov’t doesn’t control it, but it does 4) Gov’t as Regulator
impose various restrictions on the  Gov’t regulation has negative ef-
private market fects on businesses & consumers
 Gov’t regulations increase the cost
3) Gov’t as Provider of business & reduce the incen-
tives to produce
 Public sector – part of the economy
that involves the goods provided by
the government 7 Economic Goals of a Market Economy
 Private sector – part of the econ- 1) Economic Freedom – freedom to
omy that involves the goods pro- buy or sell what we want, make
vided by private firms choices with little interference by
the government
 Public Good/Service – shared good 2) Economic Efficiency/Innovation –
or service for which it would be im- making the most of scarce re-
practical to make consumers pay in- sources, using your resources wisely
dividually and to exclude nonpayers and productively by improving upon
(gov’t provided) existing technology
o Ex: Roads, Bridges, Public 3) Economic Growth – improving the
Education, Military, Na- economy from year to year, improv-
tional Park, Snow Removal, ing people’s standard of living
Police, etc. 4) Full Employment – highest amount
 Redistribution of Income is when of the labor force that could be em-
the gov’t takes from one group & ployed within an economy at any
reallocates to another group given time (95% employment rate
 Transfer payments – transfers of or better)
income from one person or group to 5) Economic Security – government
another even though the receiver will provide a safety net in times of
does not provide any goods or ser- economic downturns
vices in return 6) Price Stability – knowing that
o Examples: Welfare, Social goods & services will consistently
Security, Unemployment, be available at stable prices
Food Stamps, etc. 7) Economic Equity – Equal pay for
 Safety net – gov’t programs de- equal work (fairness); being paid ac-
signed to protect people from eco- cording to your skill level and not
nomic hardships discriminating based on age, gender,
race/ethnicity, religion, etc.