Basic Problems in Economics

Vocabulary:• Economics—the study of how individuals, families, businesses, and

societies use limited resources to fulfill their unlimited wants.

• wants

• needs

• scarcity

• factors of production

• land (economic term)

• labor

• goods

• capital

• productivity

• entrepreneurship

• technology

Needs vs. Wants

food

clothing

shelter

education

Health care

basic survival

new car

iPad

iPhone

X Box One

movie tickets

jewelry

Choices:People make choices how to spend their income.What choices have you made recently with your money?

Businesses also make choices:• what to produce now• what to produce later• what to stop producing

These decisions affect workers’ incomes and people’s ability to buy.

Societies face choices about how to utilize their resources in the production of goods and services.

How people and societies make these choices is the focus of economics.

Scarcity

The Basic Problem of Economics

Factors of ProductionResources needed to produce goods and services

land labor

capitalentrepreneurship

technology

Trade-OffsOpportunity Cost

The value of the next best alternative that had to be given up to do the action that was chosen.

When you make a trade-off (and you always make trade-offs), you lose.In economics, opportunity cost is always an opportunity that is given up.

Economic SystemsThree Basic Questions:

What should be produced? How should it be produced?

For whom should it be produced?

Types of Economic Systems

Traditional economy

Command Economy

Market Economy

Mixed Economy

Characteristics of the American Economy• little or no government control

• freedom of enterprise

• freedom of choice

• private property

• the profit incentive

• competition

1. Limited role of government:capitalism: economic system in which private individuals own the factors of production and decide how to use them within legislated limits

capitalism=market system

How is the government involved in our economy?• Federal agencies regulate the quality of various foods and drugs.• Agencies watch over the nation’s money and banking system.• Agencies inspect workplaces for hazardous conditions.• Agencies guard against damage to the environment.• Uses tax money to provide social programs such as Social Security and Medicare.• State and local governments have roles in education, job training, recreation, and

care for the elderly.

2. Freedom of Enterprise:free enterprise system: individuals are free to own and control the factors of production.

Government legal restrictions:

• Zoning regulations

• Child labor laws

• Hazardous waste disposal

• Other regulations limit free enterprise to protect you and your neighbors

3. Freedom of Choice:The other side of free enterprise

• Buyers, not sellers, make the decisions about what should be produced.

4. Profit Incentive:Profit: The money left after all the costs of production have been paid, including wages, rents, interest, and taxes.

• The desire to make a profit=profit incentive.• The desire that motivates entrepreneurs.• Risk of failing also.

5. Private Property:Property held by individuals or groups rather than by the federal, state, or local governments.

• Free to buy• Can control the use• The Constitution guarantees an owner’s right to private property and its use.• The government can’t seize or use private property unless it pays the owners.

6. Competition:The rivalry among producers of similar products to win more business by offering the lowest prices or better quality.

• In a free enterprise system, the lure of profits encourages competition• Effective competition requires a large number of independent sellers• Competition leads to an efficient use of resources• Businesses have to keep prices low enough to attract buyers, yet high enough to

make a profit.