Introduction to Economics and Economic Systems
This unit will focus on the following questions: What is the study of Economics? What is the basis for economic decision making? How is the U.S. economy organized? How do you measure economic performance? What are the goals for an economy?
Terms
Adam Smith
Business cycle
Capital resources (capital)
Circular flow of economy
Command economy
Consumer goods
Decision Making/Cost-Benefit Analysis
Economic systems
Entrepreneurship
Factors of production
Goods and services
Gross Domestic Product (GDP)
Human resources (labor)
Incentives
Invisible hand
Laissez-faire
Macroeconomics
Market economic system
Microeconomics
Mixed economic system
Natural resources (land)
Needs and wants
Opportunity Benefit
Opportunity Cost
Scarcity
Trade-offs
Traditional economic system
Definition of Economics
· Economics is the study of how society manages and allocates its scarce resources
· It is the study of how people produce, distribute, and consume their resources to satisfy their needs and wants.
Why do we need Economics?
· Resources are SCARCE
· People have unlimited wants and needs
· Society to allocate resources
Basic Economic Concepts
Scarcity
All resources are scarce. There are alternative and competing uses for every resource (including personal resources, such as your time and your mind). Scarcity is the fundamental economic problem facing ALL societies. Essentially it is how to satisfy unlimited wants with limited resources. In economics, scarcity is defined as a condition of limited resources, where society does not have sufficient resources to produce enough to fulfill subjective wants. Alternatively, scarcity implies that not all of society's goals can be attained at the same time, so that trade-offs are made of one good against others. Economics has been called the dismal science because it studies the most fundamental of all problems, scarcity. Because of scarcity we all face the dismal reality that there are limits to what we can do. No matter how productive we become, we can never accomplish and enjoy as much as we would like. The only thing we can do without limit is desire more. Because of scarcity, every time we do one thing we necessarily have to forgo doing something else desirable. So there is an opportunity cost to everything we do, and that cost is expressed in terms of the most valuable alternative that is sacrificed....
Opportunity Cost
Because of the constraint of scarcity, people must choose, and for every choice that is made, cost exists. Because of the constraint of scarcity, people must choose, and for every choice that is made, costs exist. There is no free lunch. The true cost is the next best choice that you might have made, but didn’t. The classic example is "guns or butter." What should a nation produce; butter, a need, or guns, a want? If we choose the guns the cost is the butter. If we choose butter, the cost is the guns. Nations must always deal with the questions faced by opportunity cost. It is a matter of choices. Resources are limited thus we cannot meet every need or want. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.
Perception of Best Interest
People act in their idea of their own best self- interest. In the actual moment when decisions are made, people choose those options which seem best at the time.
Incentives
People respond to incentives. When incentives change, individual behavior changes in predictable ways.
Systems
Economic, political, and social systems exist to create incentives and influence behavior. They are shaped by written and unwritten rules. As the rules change, incentives and then behavior change.
Exchange and Wealth
Voluntary exchange creates wealth; wealth is sometimes an individual concept. People can produce more in less time when they concentrate on what they do best. Goods, services and ideas are traded as long as each trader believes he/she will benefit.
Outcomes
The outcomes of choices exist in the future. Decisions are based on expectations for the future
Wants
Simply the desires of citizens. Wants are different from needs as we will see below. Wants are a means of expressing a perceived need.
Needs
These are basic requirements for survival like food and water and shelter. In recent years we have seen a perceived shift of certain items from wants to needs. Telephone service, to many, is a need. I would argue, however, that they are wrong.
Factors of Production/Resources
These are those elements that a nation has at its disposal to deal with the issue of scarcity. How efficiently these are used determines the measure of success a nation has. They are
· Land - natural resources, etc.
· Capital - investment monies.
· Labor - the work force; size, education, quality, work ethic.
· Entrepreneurs - inventive and risk taking spirit. This is a rather new addition to a traditional list.
The "Three Basic Economic Questions"
These are the questions all nations must ask when dealing with scarcity and efficiently allocating their resources.
· What to produce?
· How to produce?
· For whom to produce?
Economics
Economics is the study the production and distribution of goods and services; it is the study of human efforts to satisfy unlimited wants with limited resources.
Competition
"Competition," wrote Samuel Johnson, "is the act of endeavoring to gain what another endeavors to gain at the same time." We are all familiar with competition—from childhood games, from sporting contests, from trying to get ahead in our jobs. But our firsthand familiarity does not tell us how vitally important competition is to the study of economic life. Competition for scarce resources is the core concept around which all modern economics is built.
Human resources (labor) are people, the labor used to make & sell goods & services. Athletes, technicians, scientists, therapists, hair stylists, lawyers, etc…are all examples of human resources
Natural resources are those things found in nature--animals, water, minerals, oil, land; most valuable of these are land and minerals.
Capital resources are the tools, buildings, & machinery used to make products. Factories, tractors, and computers are all examples of capital resources.
Economic Reasoning Principles
PEOPLE FACE TRADEOFFS
Scarcity exists and it doesn’t go away. Because resources are limited, people must make choices.
PEOPLE ECONOMIZE
People choose the alternatives that they perceive to offer the greatest excess of benefits over costs.
ALL CHOICES INVOLVE COSTS
The opportunity cost of a choice is the foregone alternative, the (benefits of the) alternative that was given up. Don’t ask: “What could I have done?” Ask: “What would I have done?”
It’s only the “next-best” alternative that matters.
THE CONSEQUENCES OF CHOICES LIE IN THE FUTURE
Decisions are made in light of an unknown future, based on expected costs and expected benefits. Information, experience, and knowledge inform decision-making but do not eliminate uncertainty.
RATIONAL DECISIONS OCCUR AT THE MARGIN
All-or-nothing decisions are extremely rare. Most decisions are best made by weighing the expected benefits and expected costs of the next increment: For example, the decision is not “Should we paint the house?” but “Should we paint the house this summer or wait a year?” or “Should we paint the house ourselves or hire someone to do it?”
PEOPLE RESPOND TO INCENTIVES
Incentives are rewards or punishments that influence people’s decisions. When incentives change, people’s behavior changes in predicable ways. Incentives are shaped by a society’s institutions, the formal and informal “rules of the game.”
PRICES ARE EXTREMELY POWERFUL INCENTIVES
Prices change in dynamic economies as the relative demands for and supplies of goods, services, and resources changes. The changing prices change people’s opportunity costs and thus, the choices they make.
VOLUNTARY TRADE CREATES WEALTH
Voluntary trade occurs only when both parties expect to benefit from the exchange.
Giving up things of lesser value for things of greater value makes all parties to the exchange better off. Specialization allows people to produce more by concentrating on what they do best and trading their surplus goods or services to obtain other goods and services. Society benefits as producers specialize in what others value.
MARKETS FACILITATE EXCHANGE AND INCREASE INDIVIDUAL FREEDOM
Market institutions, the written and unwritten rules governing exchange in the economy, enhance personal freedom by allowing people to make decisions in light of their perceptions of the expected costs and expected benefits they face.
GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
Externalities, lack of competition, defining and enforcing property rights, free-rider problems, and the desire to promote social goals like equity, bring the government into the economy. The pertinent question when considering government action is “Do the benefits outweigh the costs?”
This unit will focus on the following questions: What is the study of Economics? What is the basis for economic decision making? How is the U.S. economy organized? How do you measure economic performance? What are the goals for an economy?
Terms
Adam Smith
Business cycle
Capital resources (capital)
Circular flow of economy
Command economy
Consumer goods
Decision Making/Cost-Benefit Analysis
Economic systems
Entrepreneurship
Factors of production
Goods and services
Gross Domestic Product (GDP)
Human resources (labor)
Incentives
Invisible hand
Laissez-faire
Macroeconomics
Market economic system
Microeconomics
Mixed economic system
Natural resources (land)
Needs and wants
Opportunity Benefit
Opportunity Cost
Scarcity
Trade-offs
Traditional economic system
Definition of Economics
· Economics is the study of how society manages and allocates its scarce resources
· It is the study of how people produce, distribute, and consume their resources to satisfy their needs and wants.
Why do we need Economics?
· Resources are SCARCE
· People have unlimited wants and needs
· Society to allocate resources
Basic Economic Concepts
Scarcity
All resources are scarce. There are alternative and competing uses for every resource (including personal resources, such as your time and your mind). Scarcity is the fundamental economic problem facing ALL societies. Essentially it is how to satisfy unlimited wants with limited resources. In economics, scarcity is defined as a condition of limited resources, where society does not have sufficient resources to produce enough to fulfill subjective wants. Alternatively, scarcity implies that not all of society's goals can be attained at the same time, so that trade-offs are made of one good against others. Economics has been called the dismal science because it studies the most fundamental of all problems, scarcity. Because of scarcity we all face the dismal reality that there are limits to what we can do. No matter how productive we become, we can never accomplish and enjoy as much as we would like. The only thing we can do without limit is desire more. Because of scarcity, every time we do one thing we necessarily have to forgo doing something else desirable. So there is an opportunity cost to everything we do, and that cost is expressed in terms of the most valuable alternative that is sacrificed....
Opportunity Cost
Because of the constraint of scarcity, people must choose, and for every choice that is made, cost exists. Because of the constraint of scarcity, people must choose, and for every choice that is made, costs exist. There is no free lunch. The true cost is the next best choice that you might have made, but didn’t. The classic example is "guns or butter." What should a nation produce; butter, a need, or guns, a want? If we choose the guns the cost is the butter. If we choose butter, the cost is the guns. Nations must always deal with the questions faced by opportunity cost. It is a matter of choices. Resources are limited thus we cannot meet every need or want. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.
Perception of Best Interest
People act in their idea of their own best self- interest. In the actual moment when decisions are made, people choose those options which seem best at the time.
Incentives
People respond to incentives. When incentives change, individual behavior changes in predictable ways.
Systems
Economic, political, and social systems exist to create incentives and influence behavior. They are shaped by written and unwritten rules. As the rules change, incentives and then behavior change.
Exchange and Wealth
Voluntary exchange creates wealth; wealth is sometimes an individual concept. People can produce more in less time when they concentrate on what they do best. Goods, services and ideas are traded as long as each trader believes he/she will benefit.
Outcomes
The outcomes of choices exist in the future. Decisions are based on expectations for the future
Wants
Simply the desires of citizens. Wants are different from needs as we will see below. Wants are a means of expressing a perceived need.
Needs
These are basic requirements for survival like food and water and shelter. In recent years we have seen a perceived shift of certain items from wants to needs. Telephone service, to many, is a need. I would argue, however, that they are wrong.
Factors of Production/Resources
These are those elements that a nation has at its disposal to deal with the issue of scarcity. How efficiently these are used determines the measure of success a nation has. They are
· Land - natural resources, etc.
· Capital - investment monies.
· Labor - the work force; size, education, quality, work ethic.
· Entrepreneurs - inventive and risk taking spirit. This is a rather new addition to a traditional list.
The "Three Basic Economic Questions"
These are the questions all nations must ask when dealing with scarcity and efficiently allocating their resources.
· What to produce?
· How to produce?
· For whom to produce?
Economics
Economics is the study the production and distribution of goods and services; it is the study of human efforts to satisfy unlimited wants with limited resources.
Competition
"Competition," wrote Samuel Johnson, "is the act of endeavoring to gain what another endeavors to gain at the same time." We are all familiar with competition—from childhood games, from sporting contests, from trying to get ahead in our jobs. But our firsthand familiarity does not tell us how vitally important competition is to the study of economic life. Competition for scarce resources is the core concept around which all modern economics is built.
Human resources (labor) are people, the labor used to make & sell goods & services. Athletes, technicians, scientists, therapists, hair stylists, lawyers, etc…are all examples of human resources
Natural resources are those things found in nature--animals, water, minerals, oil, land; most valuable of these are land and minerals.
Capital resources are the tools, buildings, & machinery used to make products. Factories, tractors, and computers are all examples of capital resources.
Economic Reasoning Principles
PEOPLE FACE TRADEOFFS
Scarcity exists and it doesn’t go away. Because resources are limited, people must make choices.
PEOPLE ECONOMIZE
People choose the alternatives that they perceive to offer the greatest excess of benefits over costs.
ALL CHOICES INVOLVE COSTS
The opportunity cost of a choice is the foregone alternative, the (benefits of the) alternative that was given up. Don’t ask: “What could I have done?” Ask: “What would I have done?”
It’s only the “next-best” alternative that matters.
THE CONSEQUENCES OF CHOICES LIE IN THE FUTURE
Decisions are made in light of an unknown future, based on expected costs and expected benefits. Information, experience, and knowledge inform decision-making but do not eliminate uncertainty.
RATIONAL DECISIONS OCCUR AT THE MARGIN
All-or-nothing decisions are extremely rare. Most decisions are best made by weighing the expected benefits and expected costs of the next increment: For example, the decision is not “Should we paint the house?” but “Should we paint the house this summer or wait a year?” or “Should we paint the house ourselves or hire someone to do it?”
PEOPLE RESPOND TO INCENTIVES
Incentives are rewards or punishments that influence people’s decisions. When incentives change, people’s behavior changes in predicable ways. Incentives are shaped by a society’s institutions, the formal and informal “rules of the game.”
PRICES ARE EXTREMELY POWERFUL INCENTIVES
Prices change in dynamic economies as the relative demands for and supplies of goods, services, and resources changes. The changing prices change people’s opportunity costs and thus, the choices they make.
VOLUNTARY TRADE CREATES WEALTH
Voluntary trade occurs only when both parties expect to benefit from the exchange.
Giving up things of lesser value for things of greater value makes all parties to the exchange better off. Specialization allows people to produce more by concentrating on what they do best and trading their surplus goods or services to obtain other goods and services. Society benefits as producers specialize in what others value.
MARKETS FACILITATE EXCHANGE AND INCREASE INDIVIDUAL FREEDOM
Market institutions, the written and unwritten rules governing exchange in the economy, enhance personal freedom by allowing people to make decisions in light of their perceptions of the expected costs and expected benefits they face.
GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES
Externalities, lack of competition, defining and enforcing property rights, free-rider problems, and the desire to promote social goals like equity, bring the government into the economy. The pertinent question when considering government action is “Do the benefits outweigh the costs?”