Intro to Economics

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Intro to Economics
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Initial Questions

• SCARCITY.
• List 10 items in your life that are scarce.
• Where does your money come from?
• How does where it comes from impact what you do
  with it?

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Four Laws of Scarcity

• 1) In order for something to be scarce, people
  must first want it.
• 2) In order for something to be scarce, some
  people who want it must be unable to get it.
• 3) What is scarce is different at different
  times and in different places.
• 4) Scarcity also involves choosing among a
  variety of uses for a particular resource.

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Defining Economics

• Economics
• the study of human efforts to satisfy what
  appears to be unlimited and competing wants
  through the use of scarce resources.
• (The science of decision making)

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Four Factors of Production

• Land- All resources found in nature
• Ex. deserts, fields, cattle.
• Labor- People with all their efforts and
  abilities excluding entrepreneurs that contribute
  to the production of goods and services.
• Ex. factory worker
• Capital- The tools equipment and factories used
  in the production of goods and services.
• Ex. Bulldozer, School
• Entrepreneurial Ability- Special Talent to
  innovate and take advantage of business
  opportunities.
• Ex. Manager at McDonalds

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Resources

• Resources are what people use to make the things
  that satisfy their needs and wants
• The three kinds of resources are
• Natural resources
• People made resources
• Human resources

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The Three Kinds of Resources

• Natural resources include air, water, land
  plants, animals, minerals and other raw
  materials. They are also known as land resources
• People-made resources include tools, factories,
  machinery and even computers. They are also know
  as capital resources or capital goods
• Human resources include the work that people can
  do, their energy, their ideas, their training and
  their skills also called labor resources

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Economics deals with

• Description- what we produce, who gets how much?
• Analysis- why are we producing?
• Explanation- communicating the how of economic
  activity to others.
• Prediction- anticipating likely consequences of
  different courses of action.

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Fallacy of Composition

• What is true for the individual may not be true
  for the whole.

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Causation Fallacy

• What you think causes something may not actually
  be the cause.
• Causation/correlation

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The Two Branches of Economics

• Micro- examines choices of individuals concerning
  one product, firm or industry.
• Ex. How one person deals with gas prices.
• Macro-examines behavior of whole economy at once.
• Ex. How the Government deals with higher gas
  prices.
• Trade, Unemployment.

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Three Basic Questions

• What to Produce?
• How to Produce?
• For whom to Produce?

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Fundamental Economic Problem

• SCARCITY-peoples wants and need are unlimited
  while the resources needed to produce the goods
  and services to meet the wants and needs are
  limited.
• Need- basic requirement for survival (food)
• Want- means of expressing a need (Choosing
  Dominos Pizza)

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Needs

• Physical needs are things that are necessary for
  life
• Ex. food, clothing and shelter
• Collective needs are the things groups of people
  need.
• Ex. water and sewer systems and fire and police
  protection
• Satisfying collective needs improves peoples
  quality of life Remember SimCity?

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Wants

• Psychological wants When people want things
  that will make them happy or give them greater
  comfort of body and mind, we call these wants.
• What people want depends on when and where they
  live.

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Opportunity Cost

• The cost of the next best alternative use of
  money, time, or resources when one choice is made
  rather than another.
• Opportunity costs are not the same for everyone.
• There is no such thing as a free lunch!

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Economic Systems

• Method used by a society to produce and
  distribute goods.
• Traditional Economy-relies on custom or ritual to
  answer the three questions.
• Low standard of living, little chance for change
  or innovation.

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• Market Economy-decisions are made by free markets
  (capitalism)
• Command Economy-government is in command of the
  economy and decides how to answer the three
  questions.
• Traditional Economy

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Adam Smith

• Scottish Philosopher-(1723-1790)
• The Wealth of Nations
• Focus on productivity
• Restricting the role of government
• Laissez faire, Let them do as they please.
• Invisible Hand- self regulation of the market
  through competition

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Output

• Smith showed that what a nation produces, called
  its output depends mostly on the skills of its
  workers or, in other works, a nations wealth is
  created by the sum total of the labor of its
  people
• Output is used to satisfy the nations wants in
  two ways
• 1) Some things are used directly by the nations
  people
• 2) Other things can be sold to buy goods from
  other nations

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Advantages and Disadvantages

• Advantages- Efficiency, individual freedom,
  flexibility (system can change to fit the needs
  of society)
• Disadvantages- Winners and Losers in a
  competitive market, some are ignored, unfair
  world, sometimes very unstable (Great Depression).

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Communism

• System of economics and politics by which the
  factors of production are owned by the
  government.
• Marx and Engels (1848) The Communist Manifesto
• Advantages- Worker security, public goods are
  provided for, communal society (reaction to
  capitalism)-workers are not taken advantage of.

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The Industrial Revolution

• Socialism developed largely in reaction to the
  poverty and other hardships that accompanied the
  Industrial Revolution.

• Karl Marx
• Karl Marxs theories, mostly worked on with
  Friedrich Engels, criticized capitalism.
• To Marx, the proletariatthe workerswere being
  so badly abused by the bourgeoisie the
  capitaliststhat they were certain to rise up and
  overthrow the capitalistic system.

• Socialists vs. Communists
• The socialist movement was split during the
  nineteenth century those who believed socialism
  could only be attained by a violent revolution
  became communists, and those who believed
  democratic processes could be used became todays
  modern socialists.

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Marxs Theory in Action

• 1. Marxs view of history
• To Marx, all of history was a struggle between
  social classes competing for control of
  productive property.
• 2. The Labor Theory of Value
• In Marxs view, the value of a commodity was set
  by the amount of labor put into it.
• 3. The Nature of the State
• Marx saw the state and its government as tools by
  which the capitalists maintained their order and
  privileges.
• 4. The Dictatorship of the Proletariat
• Marx did not believe a free, classless society
  would initially be formed, but rather, in the
  transition an authoritarian state would represent
  and enforce the interest of the masses.

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Some Communist Nations

• China
• When Mao Zedong took control of China in 1949,
  the country developed its own version of central
  planning.
• The Chinese economy today, however, has evolved
  into a mix of state-controlled enterprises and a
  growing class of private enterprises.

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• Cuba
• Fidel Castro led a revolution in Cuba in 1959 to
  overthrow a corrupt government. In 1961, Castro
  declared himself a Marxist and the country became
  communist in nature.

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• North Korea and Friends
• North Korea is one of the few remaining communist
  countries in the world.
• Communism also spread in the Southeast Asian
  countries of Vietnam, Laos, and Cambodia during
  the mid-1970s.

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Disadvantages of Communism

• Lack of individual freedom
• Same money no matter how hard you work (few
  promotions)
• Inefficiency of Central Planning
• (cant control everything)

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Socialism

• Government owns some resources and determines
  what is produced.
• (Offshoot of Communism)
• In between capitalism and communism.
• Advantages-allows the workers greater security
  and public goods than capitalism.
• Disadvantages-lack of efficiency, people cannot
  pursue their special interests without government
  permission in most cases.

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To Summarize Economic Systems
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Economic Conflict

• Economic decisions are based on values beliefs,
  and opinions as well as on facts.
• The decision in any one case depends on who makes
  the decision and what is important to the
  decision maker.
• Because economic decisions are based on values,
  beliefs and opinions, these decisions often
  involve conflict between the people who control
  resources and those who have no control over
  resources.
• Economic choices are made by consumers, by
  business and industry and by governments

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Settling Economic Conflicts

• The two ways that economic conflicts may be
  settled
• Market bargaining
• Government actions

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Market Bargaining

• Market Bargaining refers to the way economic
  conflicts are settled by the way people buy and
  sell goods and services
• Consumers use market bargaining when they decide
  what to buy.
• Workers use market bargaining when they decide
  where they want to work
• Businesses use market bargaining when they decide
  on a price

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Government Actions

• Government Actions are when state and federal
  lawmakers make rules for many economic decisions
• Example Minimum wage law
• Property and contracts settled in court
• Constitution protects the right to own property

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The PPC or PPF

• Production Possibilities Curve
• Production Possibilities Frontier
• A curve depicting all maximum output
  possibilities of two or more goods given a set of
  inputs (resources, labor, etc.).
• For example, in the second diagram, the decision
  to increase the production of computers from 5 to
  6 (from point Q to point R) requires a minimum
  loss of food output. However, the decision to add
  a tenth computer (from point T to point V) has a
  much more substantial opportunity cost.

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Assumes that Resources are fully employed

• Attainable vs. Unattainable Points are shown
  below

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• A total increase in technology would cause the
  curve to move more outward
• Curve reflects increase in opportunity cost.

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Market Structures