Economics Introduction:

Chapter 18

What economics is not?

• Economics is not about money. •What is money?•Where does it come from?

Economics

• Economics: the study of how people choose to use resources.• It is the study of choices.

• What are your resources? • Examples: physical power, time, money, property…

• Economics is not a science.• It is a set of theories, but none, has scientific validity.• Since it is about human choices, there is no scientific

standard.• Why is this important for creating economic policy in

government?

The Problem• Why would we need to devote a study

to choice?

• Consider WANTS and NEEDS

The Problem• Economics exists due to scarcity.• Scarcity: lack of resources• Also: the fundamental economic problem of having

seemingly unlimited human wants and needs in a world of limited resources. It states that society has insufficient resources to fill all human wants and needs.

• Economics is the study of how we choose to use those limited resources.• Many types of resources and choices to be made.

• Economists use economic models to predict how we will make choices. (Economic Model: representations of the “real world” that are used to influence decisions, explain how decisions are made, and predict economic change.)

Making Economic Decisions

• Trade Offs: the alternative you face of you decide to do one thing rather than another. (the situation in which there is a gain in one area and a loss in another)

• Opportunity Cost: the cost of the next best thing, use of time, or resources when you choose to do one thing rather than another. (the value of the choice made in the trade off)

THE METRO COOKIE?

COLLEGE?

Business Costs (Budgeting)

• Fixed Costs: costs or expenses that are the same no matter how many units of a good you produce.

• Variable Costs: expenses that change with the number of products produced

• Total Costs: fixed costs + variable costs = total costs

• Marginal Cost: the extra or additional cost of producing one additional unit of output

• Marginal Benefit: the additional or extra benefit associated with an action

• Cost-Benefit Analysis: Determine the costs and benefits of an economic decision to determine if it is a logical choice.

Economics as civics

• Why do we study economics in a civics course?

• What is the effect of your individual economic choices on the national economy?• If you knew you could get away without

paying taxes, would you? • What are the consequences if your choice was

representative of everybody else’s choice?

Market Economy

• Market Economy: system in which supply, demand, and prices help people make decisions about how to allocate their resources.

• Capitalism: private citizens own most of the means of production.

• Free-Enterprise: little-to-no government interference or regulation in the markets

Incentives

• Rewards that are offered to try to persuade people to make certain decisions or actions.• Credit Cards• Buying in bulk• Honor Role => Prizes

Determining Government’s Role in economics

• Keep Competition- avoid monopolies• Competition keeps businesses working efficiently,

innovating, and keeps prices fair for consumers.

• Provide essential services or services that the private sector does not• schools, welfare, justice, defense

• Regulation• Sticks: penalties• Examples: Rules (laws), taxes

• Carrots: incentives• Examples: subsidies, tax breaks

Chapter 19• Two Basic Forms of Production

1. Goods: Tangible Products

2. Services: performed works

• Factors of Production- Resources necessary to produce goods and services1. Natural Resources: naturally forming substances

2. Labor: human resources in form of physical and mental effort

3. Capital: money and “capital goods” (goods used in the production of goods)

4. Entrepreneurship: creators, innovators, and risk takers

Economic Activity

Factor Market- Households

sell- Businesses

Buy

Product Market- Businesses sell- Households buy

Businesses- Buy resources- Sell Products

Households- Sell Resources- Buy Products

Money Income

ConsumptionExpenditures

Costs

Revenue

ServiceService

GoodsGoods

GovernmentTaxes Taxes

Costs

Costs

G and S G and S

G and S

Service

Market Economy

• Who controls the factors of production in our economy?

• Is this a good system?

• Where does economic activity take place?

Markets

• Markets: a place where exchanges of resources takes place• At work, labor is sold in the “factor market.”• At stores, goods are purchased in the “product

market.”

• Who controls the markets?

Consumer Sovereignty

• Consumer sovereignty: the assertion that consumer preference determine the production of goods and services.• “Consumer as king.”• Examples:• New Coke (1985)• Crystal Pepsi

Freedom/Rights Required

• Economic Freedom: the politico-economic belief that individuals should have the freedom to produce, trade, and consume any goods and services acquired without the use of force, fraud, or theft.

• Private Property Rights: freedom to use and dispose of our property as we choose (as long as we don’t interfere with another’s rights)• Incentive?

Competition

• Why is competition in business good?• Price?• Quality?• Creates happy consumers

• Competition rewards most efficient producers• Those that can’t produce efficiently will go out

of business• Those that do produce efficiently will make

profit

Profit Motive

• The purpose and goal of any business is to make profit. (for-profit business)• Exception: non-profit business (what is their

goal?)

• The ability to make gains or profits is what moves businesses and individuals past risk.

• Profit = Revenue – Total Costs

1776

• What happened in 1776?

• Wealth of Nations by Adam Smith (Scottish)• Used logic and reason to describe the benefits

of Free Enterprise or “Laissez-Faire” Economics• “Free Hand” or “Let Do”• Remove government from the economy and

privatize the market place• Who read his works?