Chapter 1The Economic Problem

These slides supplement the textbook, but should not replace reading the textbook

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What is theEconomic Problem?

Because we live in a world of scarce resources, but people have unlimited wants and needs, how do we meet their needs in this world of scarcity?

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What is a good?A tangible item that is used to satisfy wants

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What is a service?An intangible activity that is used to satisfy wants

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What is afree good or service?

There is enough of a good or service to go around to everyone who wants it for free

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What is a Scarce Good or Service? There is not enough of a good or service to go around to everyone who wants it for free

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What is a resource?Something that is used to produce goods and services

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Who gets when a good is scarce?

Consumers who have the money and want it the most

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What is a market?A set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms

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How do we solve the allocation problem in a free market?

Buyers and sellers compete in the market

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What assumption do we make concerning

the market?Economists only consider market transactions.

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Who gets when a good is scarce?

Consumers who have the money and want it the most

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Who wasAdam Smith?

He wrote the Wealth of Nations in 1776 – known as the father of modern day economics.

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According to Adam Smith, what is the

invisible hand?Self interest will guide the economy to produce what we want and offer us reasonable prices

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What was the main idea of the Wealth

of Nations by Adam Smith 1776?Everyone would benefit from less government and free trade

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Is Self Interest a greedy concept?

In a free market you get what you want by helping other people get what they want.

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What is thePrice Mechanism?

Prices:• Convey information• Give incentives• Enables producers the

financial capital to satisfy consumers wants and needs.

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What assumption do economists always

make?When price changes nothing else changes.

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What isNormative Economics?

Opinions or value judgments are made

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What isPositive Economics?

Explains cause and effect.

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What are 2 common pitfalls to avoid?

• Correlation with causation.• Fallacy of composition.

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What are the factors of production (resources)?

• Land• Labor• Capital• Entrepreneurship

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What is land?Plots of ground and other natural resources used to produce goods and services

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What is labor?The physical and mental efforts of humans used to produce goods and services

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What is capital?Buildings, equipment, and human skills used to produce goods and services

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What is human capital?

The skills used to work with capital

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What does money allow you to do?

Make choices

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What isentrepreneurial ability?Managerial and organizational skills combined with the willingness to take risks

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What are characteristics of Entrepreneurs?

has a dreamovercomes obstacles delayed gratification is a risk taker strives to be unimportant understands the process of

duplication >

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Why can the entrepreneur have more

free time, make more money, and have more

security than an employee?

A business owner can duplicate himself

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How can you duplicate yourself?•employees• rental property•savings in a bank•owning shares of stock

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Why is Duplication the flip side of debt?Life is either an adding to or a taking away, growth is adding to, not growing is taking away

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What are two basic laws of entrepreneurship?

What ever you have you will be given more, and what you do not have will be taken away

Whatever you give away you keep and whatever you keep you lose

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What is the first law of wealth building?

Pay yourself first

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What is the name of the book that explains the principles

of wealth building?

The Richest Man in Babylon, 1926, by George S. Clason

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What is the name of the book that

explores wealthy characteristics?

The Millionaire Next Door, 1996, Stanley & Danko

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What does the term “Equilibrium” mean?

A tendency toward

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What is the Austrian view of equilibrium?Austrians believe that a free market will seek full employment

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What is the Keynesian view of

equilibrium?The economy could tend toward a less than full employment equilbium

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What is the Austrian view of growth?

Sustainable growth depends on savings, exports, and investments

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What is the Keynesian view of growth?

•Demand management•Large public sector•Wealth redistribution•Minimum wage laws•National debt

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What about planning?

Austrians have a negative view toward planning – Keynesians embrace planning policies

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What is the“rule of law”?

The willingness of a people to submit themselves to the law; there is a respect and adherence to the law

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What is the“rule of man”?

The practice of putting oneself above the law when one has the power to do so

END