Fundamental Concepts of Economics What is Economics?

Unit Notes, Key Terms, and Concepts

Widget Game Debriefing1. Were you successful?2. Why weren’t you successful?3. Why were some teams able to produce more

widgets than others?4. How did your team adapt to the reality you

were faced with?5. From a bigger picture – what would you call

the marker, paper clips, paper, and the people used to make the widgets?

6. How do you think the widget game relates to real life?

7. How do you think this relates to the bigger picture of economics?

Overview• ECONOMICS is the study of how

people seek to meet their needs and wants by making choices.

• SCARCITY = the condition that exists when unlimited wants exceed limited productive resources.◦needs & wants are greater than

resources which are both limited and desirable

◦not temporary/always exist◦result = choices must be made

Productive ResourcesAre items necessary to produce

goods and services

Four Categories of Productive Resources◦Land (natural)◦Labor (human)◦Capital (goods) Physical and

Human◦Entrepreneurship

Brainstorming Activity – Identify 5 examples of each

Land Labor

Capital Entrepreneurship

Factors of Production Activity

Factors of Production

Land Entrepreneurship

Capital Labor

Identify a scenario in which an entrepreneur is using various factors of production to run his/her business (make-up a business). Identify necessary resources and identify which category each resource falls.

Resource AllocationSupply and Demand – based on

who can afford the resource – use of prices

Authority – a group/person in power decides

Random Selection – lottery – gives everyone the same chance

First Come, First ServedPersonal CharacteristicContest

Key Questions1) What to produce?

2) How to produce?

3) For whom to produce?

Opportunity Cost Defined: value of the next best alternative given up

when making a choice.

◦ Choice causes you to give up one option in order to gain the benefits of another.

◦There is no such thing as a free lunch!!!!

Trade-offs are ALL possible alternatives, while OC is only the next best alternative.

Production Possibilities

Answers Question: What to produce?

Defined: relationship between two possible alternatives when using ALL available resources.◦can be graphed in a PPC curve to

illustrate

◦The two alternatives are INTERDEPENDENT with one another.

Production Possibilities:What to produce?

0 1 2 3 4 5 6 7 8 9 100

10

20

30

40

50

60Production Possibilities

Production Pos-sibilities

Y Axis – Choice #1X Axis – Choice #2

As the production of Choice 2 increases, what happens to the production of Choice 1?

UNDERUTILIZATION oc-

curs when you fail to use all

available resources

A

B

C

Production PossibilitiesProduction Possibility Frontier

◦all the possibilities of production along the curve

Underutilization ◦occurs inside the curve – meaning

you are not using all available resources

Production Possibilities Frontier (PPF)

Is Point C attainable?

Is Point D attainable?

Make Your Own Example…Create your own situation where

you are weighing the opportunity costs between two choices…1. Construct a PP Table2. Use your table to construct a PPC

Marginal Cost (MC) vs. Marginal Benefit (MB)MC defined - the COST of procuring

one more item

MB defined - the BENEFIT associated with gaining that one additional item

Marginal Analysis - Occurs when weighing the MC of an option in comparison to the MB◦Rational Decision = MB > MC

Marginal Analysis

X

Y

Z

Marginal Analysis

X

Y

Z

Where do my Marginal Benefits outweigh my Marginal Costs?

Where do my Marginal Costs outweigh my Marginal Benefits?

If we are thinking rationally, at what point would I want to pursue further education?

Thinking at the MarginEconomists look at the “additional”

unit of cost compared to each “additional” unit of benefit

◦Known as “thinking at the margin” and assumes rational behavior

◦PROFIT Maximization MC = MB (Point Z on sample graph

Example of MC & MBEX. Think about pizza –

o You are willing to pay the price charged for a slice as long as you are hungry…

o What will happen to your Marginal Benefit as you become more and more full?

o as you get full, you will no longer be willing to pay for a slice because MC exceeds MB

Voluntary/Non-Fraudulent ExchangeGiven: Productive resources are

scarce and not distributed evenly throughout the world.

◦How do individuals/nations acquire the resources they need to meet their production needs?

VOLUNTARY TRADE/EXCHANGE!!!!

Typical Results from TradeWhat happens when goods or

services are voluntarily exchanged between nations, businesses, or individuals?

◦Both parties benefit…Why?

They are both able to consume more than before trade

Satisfaction of both increases

Use of ResourcesHow do nations decide what to

produce?

How do they decide how to produce?

How do they decide for whom to produce?

General Goals of Economic Systems1. Economic Freedom

2. Economic Equity

3. Economic Security

4. Economic Growth

5. Economic Efficiency

Types of Economies: MarketCharacterized by:

◦Private ownership – people can start their own businesses accumulate wealth

◦Profit motive – incentive for entrepreneurs to start businesses keep $ they make

◦Consumer sovereignty – consumers drive the market bad products = failure

◦Competition – creates efficiency & keeps costs low government protects competition

Adam Smith laissez faire (hands off)◦Government stays out◦The Wealth of Nations (1776)

Types of Economies: CommandCharacterized by Government

Regulation◦ Control Economic Activity

Taxes Redistribution of wealth – Rich Poor Setting prices & wages Issuing worker and product safety guidelines Setting output quota Government monopoly

◦Karl Marx/Frederich Engels Communist Manifesto- (1848) Ideas led to the Bolshevik (Russian) Revolution

Making Comparisons

MARKET COMMAND

MIXED

Types of Economies: MixedMost (if not all) have

characteristics of bothSome lean more to market

(capitalism) while others lean more toward command (socialism)

Why do you think most economies are mixed?

Can you identify examples of both in America?

Government Involvement in the EconomyWhy do they get involved?

What are the benefits?

What are the costs?

U.S. Example of Costs

Government RegulationRegulation – the government

restricts producers in the free market to:

◦Promote the safety of consumers ex. EPA (Environment Protection Agency)

limits the amount of pollution produced

◦Protect consumers economically ex. Federal Reserve oversees the banks

we use

DeregulationOccurs when the government

ceases to regulate (control) industry to

◦Promote competition among producers in the open market

◦Benefit consumers through more choices & lower prices

ex. GA Public Commission deregulated natural gas

Increasing ProductivityIncreasing INPUTS = increased

OUTPUTS

◦The opposite is also true

Inputs are factors of production◦Land, Labor, Capital,

Entrepreneurship ex. Technology, interstate

highways, improved education

Results of Changing ResourcesAn increase in productive

resources can shift the Production Possibilities to the right or upward

A decrease in productive resources can shift the curve to the left or downward

Increased Resources = Increased Output

Increase in resources that impact one good more than the other…

p“A” now attainable

A

Loss of resources that impact both goods

A

Point A no longerattainable

Point A no longer attainable

A