what is economics? chapter 18. economic choices economics-the study of how we make decisions in a...
TRANSCRIPT
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What is Economics?
Chapter 18
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Economic Choices
• Economics-the study of how we make decisions in a world where resources are limited– Economics is
sometimes called the science of decision making
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Scarcity
• As individuals, we have many needs (things required for survival, such as food, clothing and shelter)
• In addition, we also have an enormous number of wants (things we would like to have, such as entertainment, vacations, and other things that make life more comfortable)
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Scarcity
• The fundamental economic problem is: scarcity (not having enough resources to produce all of the things we would like to have)
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WHAT to produce?
• One of the choices a society has to face is that of WHAT to produce
• Ex.)We may have to choose between making goods for defense or producing services for people who are retired or too ill to work
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HOW to produce?
• A second choice that society has to make is that of HOW to produce
• Ex.)If we need more crude oil, should we allow drilling in an Alaskan wildlife sanctuary, or should we restrict oil recovery to more traditional areas?
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For WHOM to produce?
• After goods and services are produced, a society must determine how the goods and services will be distributed among its members
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Using Economic Models • To economists, the word “economy” means all
the activity in a nation that together affects the production, distribution and use of goods and services
• When studying a specific part of the economy economists often formulate theories and gather data
• The data that economists collect are called economic models(simplified representations of the real world that are used to explain how the economy works, or to predict what would happen if something in the economy should change)
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Economic Models
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Economic Models
• It is important to remember that models are based on assumptions, or things that we take for granted as true– Ex.)You might assume that a restaurant is
out of your price range so you don’t try it, but you could be wrong
• It is also important to keep I mind that models can be revised
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Micro and Macro Economics
• Economics is divided into two branches– Microeconomics-the economic behavior and
decision making by individuals and small businesses
– Macroeconomics-economic behavior and decision making by government or whole industries or societies
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Making Economic Decisions
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Trade-Offs
• The economic choices people make involve exchanging one good or service for another– Ex.)You choose to buy a DVD
player, you are exchanging your $$$ for the right to own the DVD player rather than something else that might cost the same amount
• A trade-off is the alternative you face if you decide to do one thing rather than another
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Opportunity Cost
• Opportunity cost-the cost of the next best use of your time or money when you choose to do one thing rather than another– Ex.)Money to go to
college (books, living, etc.) vs. working a full-time job
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Measures of Cost
• Fixed costs-costs, or expenses, that are the same no matter how many units of a good are produced
• Variable costs-expenses that change with the number of products produced
• Total costs-fixed costs added to variable costs
• Marginal costs-the extra, or additional cost of producing one additional unit of output
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Measures of Cost
• Marginal revenue-the change in total revenue (the extra revenue) that results from selling one more unit of output
• Marginal benefit-the additional or extra benefit associated with an action
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Cost-Benefit Analysis
• Once we define the marginal costs and benefits of a decision, we can analyze the decision
• Cost-benefit analysis-economic model that compares the marginal costs and marginal benefits of a decision
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Being an Economically Smart Citizen
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Understanding Your Role in the Economy
• To be good economic citizens, we must be informed. This means that we need to have an understanding of what part we play and how we affect the economy, and how the economy affects us
• We have a market economy– Market economy-an economic system in which
supply, demand and prices help people make decisions and divide resources
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Understanding Your Role in the Economy
• A market economy is sometimes described as being based on capitalism (a system in which private citizens own most, if not all, of the means of production)
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Understanding Your Role in the Economy
• A market economy is also based on free enterprise
• Free enterprise-economic system in which individuals and businesses are allowed to compete for profit with a minimum of gov’t interference
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Understanding Your Role in the Economy
• Keeping informed
• Understanding incentives– Incentives-rewards that are offered to try
to persuade people to take certain economic actions
• Understanding the Role of the Government
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Making Wise Choices
• The ultimate goal of being an economically literate citizen is to be able to make wise choices
• When you make consumer decisions based on opportunity cost, you are engaging in rational choice– Rational choice-choosing the alternative that has
the greatest value from among comparable-quality products
– When you make rational choices you purchase the goods and services you believe can best satisfy your wants for the lowest possible costs
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The American Economy
Chapter 19
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Economic Resources
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Producing Goods and Services
• Goods-what is made (I.e. books, cars, etc. things that we use to satisfy our wants and needs)
• Services-work that is performed for someone else– Ex.) Waiting tables, cutting hair, concerts, etc.
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Factors of Production
• There are four factors of production (resources necessary to produce goods and services)– Natural resources– Labor– Capital – Entrepreneurs
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Factors of Production
• Natural resources-all of the “gifts of nature” that make production possible– Ex.)fertile fields,
abundant rainfall, forests, mineral deposits
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Factors of Production
• Labor-physical and mental efforts that people contribute to the production of goods and services– Ex.)carpenters,
bricklayers, electricians
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Factors of Production
• Capital-tools, machinery, and buildings used to make other products– Ex.)money, bulldozers,
trucks, hammers, saws, drills, etc
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Factors of Production
• Entrepreneur-individuals who start new businesses, introduce new products and improve management techniques
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Gross Domestic Product (GDP)
• People can measure their economic success by the amount of their incomes and their ability to provide for themselves and their families
• The success of the overall economy is measured in a similar way
• Gross Domestic Product (GDP)-total value of all final goods and services produced in one year
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Gross Domestic Product (GDP)
• GDP is a monetary measure—measured in $$$ (dollars)
• GDP is an important measure of standard of living (the quality of life based on the possession of necessities and luxuries that make life easier)
• GDP is measured in QUANTITY (numbers) NOT QUALITY
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Economic Activity and Productivity
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The Circular Flow of Economic Activity
There are several groups of decision makers in the economy.
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The Consumer Sector
• Consumers earn their incomes in factor markets (the markets where productive resources are bought and sold)
• Workers earn wages, salaries and tips in exchange for their labor
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The Business Sector
• When these individuals receive their incomes, they spend it in product markets (markets where producers offer goods and services for sale)
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The Government Sector
• The government sector includes the 3 levels of gov’t (federal/state/local)
• The gov’t provides services and receives revenues from the goods and services it sells
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The Foreign Sector
• The foreign sector represents all of the countries in the world—we buy products from and sell products to foreign countries
• Accounts for less than 4% of the GDP
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Productivity and Economic Growth
• Productivity-a measure of the amount of how much you produce in a given time
• Specialization-when people, businesses, regions, and even countries concentrate on goods or services that they can produce better than anyone else– Ex.)tobacco,cotton
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Productivity and Economic Growth
• Division of labor-breaking down of a job into separate, smaller tasks, which are performed by different workers– Improves productivity
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Productivity and Economic Growth
• Human capital-the sum of the skills, abilities, and motivation of people– Productivity tends to
increase when businesses invest in human capital
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Productivity and Economic Growth
• Economic interdependence-we rely on others and others rely on us– Katrina victims relied
on the rest of the country to help after the hurricane hit
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Capitalism and Free Enterprise
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Features of Capitalism
• Capitalism-economic system in which private citizens own and use the factors of production in order to seek a profit
• Free enterprise-open and equal competition
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Features of Capitalism: Markets
• Markets are places where goods and services are sold
• Consumer sovereignty-the role of the consumer as the ruler of the market, determining what products will be produced
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Features of Capitalism: Economic Freedom
• Freedom to produce, buy or sell products and services within the limits of the law
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Features of Capitalism: Private Property Rights
• Private property rights-we have the freedom to own and use, or dispose of, our own property as we choose as long as we do not interfere with the right of others
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Features of Capitalism: Competition
• Competition-the struggle that goes on between buyers and sellers to get the best products at the lowest prices
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Features of Capitalism: The Profit Motive
• Profit-the amount of money left over after all the costs of production have been paid
• Profit motive-the driving force that encourages individuals and organizations to improve their material well-being
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Features of Capitalism: Voluntary Exchange
• Voluntary exchange-the freedom to buy or sell anything
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Spread of Capitalism
• Two important concepts helped the spread of capitalism:– People work for economic gain– Government should have limited role in the
economy
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Adam Smith and Capitalism
• Adam Smith-Scottish economist
• Wrote Wealth of Nations in 1776
• Laissez-faire economy-limited government role in economy– “laissez-faire”-let it
alone or hands off