Unit One: Basics
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Unit One: Basics. Topic: Basic terminology and concepts. Learning Targets. The student will understand what is studied in economics. The student will describe how economic decisions are made and how individual decisions affect others.
Unit One: Basics
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Unit One: Basics Topic: Basic terminology and concepts
Learning Targets • The student will understand what is studied in economics. • The student will describe how economic decisions are made and how individual decisions affect others. • The student will describe how money, resources and goods and services flow through the economy. • The student will differentiate between the three types of economic systems and how decisions are made in each system. • The student will use economic terminology correctly.
Defining Economics • Brainstorm • Def: study of scarce resources and decision-making as it relates to the production and consumption of goods and services. • Social science • Use ceteris paribus assumption (all other things equal) • Simplified models
Decision-Making • Why can’t everyone have everything? • Scarcity and resource use • How do we make decisions? • Cost-benefit analysis • Marginal analysis – “how much” concept • Opportunity cost – if I do this, I am missing out on the opportunity to gain ___. • Incentives
Cost-Benefit Analysis • Marginal cost is upward-sloping (as you produce each additional unit of an item, cost increases). • Marginal benefit is downward-sloping (consuming additional units starts to lose its pleasure). Good X MC MB and MC MB 100 101 Quantity of X
Interaction • Choices affect others. • Trade – specialization and division of tasks/labor • Why specialize and trade? • Gains • Comparative advantage – producing at a lower opportunity cost (giving up less of another good). • Circular Flow Model – resource markets and product markets
Macro vs. Micro • Macroeconomics – study of the whole; business cycle (recessions and expansions), GDP, fiscal and monetary policies, etc. • Microeconomics – study of the individual units; consumer behavior, business decisions, effects of taxation, etc.
The Four Fundamental Questions(any economic system must answer) • What to produce? • How to produce it? • Who will receive it? • How will the system accommodate change?
Free Enterprise/Capitalism/Free Market Economy • People and firms act in their own interest. • Examples: United States, Canada (really mixed economies, but close examples) • How does a market economy answer the four fundamental questions?
Market Economy - Characteristics • Private property (incentives) • Freedom of enterprise and choice (incentives) • Self-interest (incentives) • Competition (incentives) • Reliance on technology and capital goods • Specialization • Use of money • Active, but limited, government (laissez-faire)
Market Economy - Basis • Adam Smith, The Wealth of Nations, 1776 • The “invisible hand” is competition, which guides decisions made by consumers and producers acting in their own self-interest. • Because each individual wants more, they work harder, which increases overall production. • If the market is left alone, it will function on its own because of the “invisible hand.” • Three virtues: efficiency, incentives and freedom.
Other Economic Systems • Socialism – common ownership of resources; more government-funded programs • Communism – government-owned resources; government-controlled decisions
Terms • Goods • Services • Consumer • Producer • Private (sector) • Public (sector) • Cost • Price • Market failure • Externality
