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Economics

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The study of scarcity and choice.

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Every economic issues involves, at its most basic level...

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Individual Choice

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Individual Choice

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Decision by individuals about what to do and what not to do

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Economy

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A system that coordinates choices about production with choices about consumption, and distributes goods and services to the people who want them.

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The United States has a ______ economy.

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Market

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Market Economy

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In which production and consumption are the result of decentralized decision by many firms and individuals. *There is no central authority telling people what to produce or where to ship it. *Each individual producer makes what he or she thinks will be most profitable, and each consumer buys what he or she chooses.

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An alternative to a market economy is a _______ economy.

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Command

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Command Economy

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Industry is publicly owned and there is a central authority making production and consumption decisions.

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Where and when have command economies been most notable tried?

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Soviet Union between the years 1917 and 1991.

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Why did a command economy prove to not be very successful within this region?

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Producers in the Soviet Union routinely found themselves unable to produce because they did not have crucial raw materials, or they succeeded in producing but then found that nobody wanted what the central authority had them produce. Consumers were often unable to find necessary items- command economies are famous for long lines at shops.

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What is at the root of the problem with command economies?

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A lack of incentives.

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Incentive

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Rewards or punishments that motivate particular choices.

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Describe the incentives of a market economy.

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Producers are free to charge higher prices when there is a shortage of something, and to keep the resulting profits. High prices and profits provide incentives for producers to make more of the most-needed goods and services and eliminate shortages.

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A plan that calls on manufacturers to reduce pollution voluntarily...

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Probably won't succeed due to a lack of incentive.

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What do property rights do?

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Establish ownership and grant individuals the right to trade goods and services with each other.

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What does this function (of property rights) thus create?

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Many of the incentives in market economies.

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With the right to own property comes...

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The incentive to produce things of value.

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What can you do with things of value?

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Keep, or trade for mutual gain.

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Ownership creates... (Give an example)

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The incentive to produce resources to their best possible use. Ex: Property rights to a lake gives the owners an incentive not to pollute that lake if its use for recreation, serenity, or sale has a greater value.

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What kind of decision are made in any economy?

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Marginal decisions

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Marginal Decisions

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Involve trade-offs at the margin: Comparing the costs and benefits of going a little bit more of an activity versus a little bit less.

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Marginal Benefit

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The gain from doing something one more time.

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Marginal Cost

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The cost of doing something one more time.

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If the marginal benefit exceeds the marginal cost...

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The activity should continue (and vice versa, but OPPOSITE!).

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The study of the relationship between marginal benefit and marginal cost is called...

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Marginal Analysis

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Why does marginal analysis play a central role economics?

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Because the formula of doing things until the marginal benefits no longer exceeds the marginal costs is the key to deciding "how much" to do of any activity.

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Limited income isn't the only thing that keeps people from having everything they want because ______ is also in limited supply. (Give an example of this)

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Time. Ex: Convenience stores usually charge higher prices than larger supermarkets. But they fulfill a valuable role by catering to customers who would rather pay more than spend the time traveling farther to a supermarket where they might also have to wait in longer lines.

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Why do individuals have to make choices?

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Resources are scarce.

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Resource

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Anything that can be used to produce something else.

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The economy's resources, sometimes called _______ ______ _________, can be classified into four categories.

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Factors of production

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What are the four categories that factors of production may be split into?

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Land, labor, capital, and entrepreneurship.

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List some examples of land.

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Timber, water, minerals, and all other resources that come from nature.

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List some examples of labor.

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The effort of workers.

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List some examples of capital.

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Machinery, buildings, tools, and all other manufactured goods used to make other goods and services.

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List some examples of entrepreneurship.

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Risk taking, innovation, and the organization of resources for production.

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When is a resource scarce? (Give an example)

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When there is not enough of it available to satisfy the various ways a society wants to use it. Ex: There are limited supplies of oil and coal, which currently provide most of the energy used to producer and deliver anything we buy. And in a growing world economy with a rapidly increasing human population, even clean air and water have become scarce resources.

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What is one way for a society to make choices? (Give an example)

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By simply allowing them to emerge as the result of many individual choices. Ex: There are only so many hours in a week, and Americans must decide how to spend their time. How many hours will they spend going to supermarkets to get lower prices rather than saving time by shopping at convenience stores? The answer is the sum of individual decisions: each of the millions of individuals in the economy makes his or her own choice about where to shop, and society's choice is simply the sum of those individual decisions.

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Give an example of a decision that a society would decide are best not left to individual choice.

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Ex: Two of the authors live in an area that until recently was mainly farmland but is now being built up rapidly. Most local residents feel that the community would be a more pleasant place to live if some of the land were left undeveloped. But no individual has an incentive to keep his or her land as open space, rather than sell it to a developer. So a trend had emerged in many communities across the US of local governments purchasing underdeveloped land and preserving it as open space. Decisions about how to use scarce resources are often best left to individuals but sometimes should be made at a higher, community-wide level.

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Opportunity Cost

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The value of what you must give up when you make a particular choice.

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Why are opportunity costs crucial to individual choice?

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Because, in the end, all costs are opportunity costs.

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The opportunity costs of a choice includes...

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All costs, whether or not they are monetary costs, of making that choice.

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The opportunity cost of attending college is the value of...

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All necessary monetary payments for tuition and fees plus the foregone income from the best available job that could take the place of going to college.

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The opportunity cost of going to college is high for people who...

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Could earn a lot during what would otherwise be their college years.

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Microeconomics

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The branch of economics concerned with how individuals make decisions and how these decisions interact.

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What does microeconomics focus on?

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Choice made by individuals, households, or firms- the smaller parts that make up the economy as a whole.

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What does macroeconomics focus on?

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The bigger picture- the overall ups and downs of the economy.

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What do you learn when you study macroeconomics?

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How economists explain the fluctuations of the economy and how governments can use economic policy to minimize the damage they cause.

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What does macroeconomics focus un?

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Economic aggregates. How the actions of all the individuals and firms in the economy interact to produce a particular economy-wide level of economic performance.

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Economic Aggregates

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Economic measures such as the unemployment rate, the inflation rate, and gross domestic product- that summarize data across many different markets.

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_______ is concerned with the general level of prices in the economy and how high or low they are relative to prices last year.

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Macroeconomics

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______ is concerned more with the price of a particular good or service.

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Microeconomics

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