EconomicsCHAPTER 1 AND 2

What is Economics?

What is economics?

Social science of decision-making.

“Economy is the art making the most out of life.”

Gary Becker

Scarcity1. Limited Supply AND

2. Desirable

More important b/c nearly everything is limited at any particular moment in time.

3. OR more than one valuable use.

Is it scarce? Handout

Opportunity Cost

The value of the next best alternative you give up when you make a decision.

Only the next best choice

TINSTAAFL

There is no such thing as a free lunch.

Opportunity COSTS

Joe’s

Arnie’s

Society’s

Factors of Production (Resources)A.K.A.—factors of production

Makes all g/s

Land—natural resources

Labor—paid human effort

Capital—g/s used to make other resources

Physical

Human

Entrepreneurship

Risk taker

Combine other factors

Micro vs. MacroMicroeconomics—study of how individuals, businesses, or markets make decisions

Macroeconomics—studies how economic activity in the aggregate—all the businesses or all the consumers

Production Possibilities Curve

Demonstrates tradeoffs and opportunity cost of producing two items

Also demonstrates marginal thinking

Constant Opportunity Cost

1 2 3 4 5

24

68

10

Tria

ngle

sSquares

Constant opportunity cost—opportunity costs stay the same for the entire curve. For each and every square, it costs two triangles.

Why? Resources are easily convertible

Increasing Opportunity Cost

Increasing Opportunity Cost—

As the production of one good increases, the costs of producing the other good gets higher and higher.

Why? Resources are not as easily converted.

What different places mean.

W is currently unattainable, to get to W you must shift the curve by acquiring new resources

Points inside the curve show inefficiency and/or unemployment

Points on the curve A-E are productively efficient—make the most g/s possible with resources.

Production Possibility Shifts Shifts outward if more resources or improved

technology Shifts inward if resources are lost More physical capital goods=more of a shift outward

Economic Systems

An organized way to produce and distribute goods and services.

Market, Command, Traditional, Mixed

3 Economic Questions every economic system must answer

What will be produced?How will it be produced?Who gets the g/s?

Traditional Economy

3 Q’s answered by habit, custom, tradition

Little freedom

Ex. Intuits, Aboriginals, Native Americans, African tribes

Advantages—little uncertainty, Social Capital

Disadvantages—discourage new ideas, economic stagnation

Command Economy

Govt. answers the 3 questions

A.k.a—central planning

Price system vs. rationing

No private property

Ex. Former Soviet Union, Cuba, N.Korea

Command Economy

Advantages Less uncertainty—Job security

Change direction quickly—ex. ag to industry, race to space

Disadvantages Little growth

Little freedom

Perverse Incentives

Power is centralized with the government, needs a large bureaucracy

Little Flexibility

Market Economy

Aka capitalism

People make the decisions

Characteristics

Private Ownership--capitalism

Consumer Sovereignty

Examples

GB, Canada, U.S., Singapore, S.Korea, Japan

Adam Smith

The Wealth of NationsFather of EconomicsSelf-Interest MotivatesCompetition Regulates

Market Economy

Advantages Freedom

Gradual Adjustments

Decentralized Decision Making

Variety of G/S

Provides Incentives for Hard Work

Provides Incentives to Conserve Resources

Disadvantages Rewards only productive resources

i.e. not everyone is provided for

Uncertainty—boom and bust cycle

Market Failures

Lack of Competition

Lack of Information

Externalities—3rd party is harmed/helped by someone else’s actions.

Positive—produces benefits to society that cost someone money

Negative—produces a detriment to society that saved someone money

Providing Public Goods—market will not provide these

Non-excludability—cannot exclude someone

Non-rivalry—one person’s consumption does not limit other people’s consumption

Examples

Free Rider Problem

Mixed Economic Systems

All economies are this!!!

Depends on the degree of government intervention

Socialism—

gov. owns some basic resources. ex. 90% of oil is owned by countries—Saudi Arabia, Venezuela, and Russia; gov.

PROVIDES basic essentials like housing and healthcare—the healthcare bill is NOT government run healthcare

http://www.heritage.org/index/ranking.aspx

AMERICA—Market Based economy with government intervention

Free Enterprise

Market Characteristics

Economic Freedom

Voluntary Exchange

Private Property

Profit Motive

Competition

AMERICA--Government

Protector

Consumer Product Safety Commission, FDA, USDA, OSHA

Protects private property—home and intellectual property

Provider

Public Goods, Safety Net—Social Security, Medicare, Medicaid, Unemployment, Food Stamps

Regulator

bustin’ trusts: Sherman Anti-Trust Act (1890), Federal Trade Commission Act (1914)

Public disclosure laws

Corrector

Corrects negative externalities by taxing or outlawing—pollution

Promotes positive externalities by subsidizing—education