Economics Study Outline – Unit 1
1. Economics
a. The study of the choices people make to satisfy their needs and wants
2. Factors of production – the resources used to produce goods and services
a. Land – natural resources
b. Labor– physical and mental effort used to make goods or services
c. Capital– a man made good used to produce or sell another good
d. Entrepreneurship – person who combines the other three factors of production to create a product
3. Scarcity
a. Basic economic problem
b. A lack of resources
c. Causes us to make choices
4. Needs – 4 needs water, basic food, basic clothing, basic shelter – necessary for survival
5. Wants – thing we buy to satisfy our impulses
6. Trade off – a compromise
7. Opportunity Cost – what you give up, the next best alternative use of a resource
8. Consumers – own the factors of production – buy products in the product market – sell in the resource market
9. Producers – produce goods and services – sell in the product market – buy in the resource market
10. Resource – anything used to produce a good or service
11. Consumer good – a good purchased for personal use
12. Productivity – the level of economic output that results from a given level of input.
a. Henry Ford – developed the assembly line for automobile manufacturing which drastically reduced the
number of workers required to build a car by making each worker more productive.
13. Production possibilities curve – used to show opportunity cost – show the combinations of 2 goods or services
14. Exchange – the process of exchanging one thing of value for another
a. Barter – exchange of goods or service for other goods or services without using money
15. Value – worth of an item
16. Service –
17. Goal of Entrepreneurship – to make profit
18. Product Market – where businesses sell goods and services to households
19. Resource Market – where households sell the factors of production
20. Traditional economy – basic economic questions are answered by tradition(the past), ritual and custom
Amish are an example in America
Disadvantage is that innovation and progress are not rewarded’
21. Pure command – the basic economic questions are answered by the government
22. Pure market – the basic economic questions are answered by individuals
23. In reality – ALL economies are mixed
24. Invisible hand Theory – Adam Smith expressed the idea that by following the “invisible hand” of self interest,
individuals would inevitably do what is best for society.
25. Authoritarian Socialism – Closest to pure command – goal is economic security – lack of worker incentive
Basic economic questions are answered by government planners
Cuba, China, North Korea and the former Soviet Union are good examples
26. Democratic Socialism – major industry is owned by government – people are free to buy and sell all other
product – goal is equality – lack of worker incentive – heavily taxed
Somewhere between capitalism and communism
27. Capitalism – Free enterprise – closest to pure market – goal is economic freedom
Government involvement is most limited
Individuals answer the basic economic questions
Contract- a legally enforceable promise or undertaking that something will or will not occur – based on
credit
33. 7 characteristics of Capitalism & Definitions
1. self interest motive – people are interested in their own well being will do what is best for themselves
2. voluntary exchange – we are free to buy and sell goods
3. freedom of choice – we get the choice on products, careers
4. private property right – individual right to buy and sell their own property, as well as own however
much they want
5. profit motive – everyone is motivated buy making money or profit
6. competition – businesses will compete to sell their products
28. Free enterprise system – synonymous with Capitalism - based heavily on the ownership of private property
29. Competition – economic condition that exists between two businesses selling the same product
What are the two main benefits from Competition. better products & better prices
Production of Capital Goods
(in millions)
Production Possibilities Frontier
for Micoland
14
A
12
B
F
10
C
8
6
G
4
D
2
0
0
1
2
3
4
5
6
7
8
9
E
10 11 12
Production of Consumer Goods (in millions)
Production Combinations
(in millions)
Capital
Goods
Consumer
Goods
A
B
C
D
E
What points represent efficient use of current resources? Why? A, B, C, D, E, all available resources are being used
What is the combination of goods at point B? 11 million capital goods and 4 million consumer goods
What is the opportunity cost of moving from Point B to Point C? 3 million capital goods
Under what conditions could this country produce at Point F? add additional resources, add new technology
What type of efficiency does point G represent? Underutilization, or inefficient