Unit 1Fundamental Concepts

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The fundamental problem that all societies face is called

scarcity. 2

This means it isn’t possible for everyone to have everything he/she wants.

Why? 3

Because

Resources are limited

But

Wants are unlimited

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Economics: Is the study of how people and

nation’s try to satisfy their unlimited wants

through the careful use of limited resources. 5

Economics is sometimes called--

“The Science of Efficiency”

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To satisfy as many needs and wants as possible we must use our scarce resources as efficiently as possible.

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Societies needs and wants are satisfied by combining various resources into finished goods and services.

Examples might include food, clothing, shelter, and transportation.

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TINSTAAFL– stands for “ There is no such thing as a free lunch.”

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Everything we do has a cost even when it seems to be free. The true cost of producing one good or service are the other things we could have had instead.

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Society must make wise choices about how to use its scarce resources.

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Every society, no matter how rich or poor, must answer 3 basic questions.

They Are:13

1 2 3

Resources: also called factors of production, or inputs are the building blocks necessary to make the goods and services which in turn satisfy needs and wants.

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These resources are classified in 4 ways.

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Figure 1.2Figure 1.2Figure 1.2

1.Land: Also called natural resources or gifts of nature which occur naturally without human effort.

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2. Labor: Includes all people with their efforts, abilities and skills brought to the workplace.

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3. Capital: Represents the tools, equipment, machinery and factories used by businesses to produce other goods and services.

This is not the same thing as financial capital/money. 22

Capital goods are critical to our nation’s ability to produce more.

This is called economic growth.

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4. Entrepreneurship: This is the risk taker in search of profits. These are people who start new businesses or come up with new ways of doing something.

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Gross Domestic Product: Is the dollar value of all final goods and services produced within a nation’s borders in 1 year.

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It is the best measure of how much our country can produce.

As GDP continues to grow, it affects our standard of living.

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Standard of living is the quality of life one has based on the possession of necessities and luxuries that make life easier.

How big a slice of pie will you get?

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Data taken from cnn.money.com on July 31, 2009.

What does this graph indicate about our current standard of living? 30

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Economic Growth: When a nation’s total output of goods and services increases over time.

The pie is getting bigger. 32

Factors that contribute to growth include the following:

More resources Better quality resources More capital goods Better technology

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Try and rank the following countries from highest to lowest in terms of their standard of living. Ask yourself who lives better?

HaitiUnited StatesIndiaGermany

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A good is a tangible item that is economically useful or satisfies a want.

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Goods can be divided into consumer goods and capital goods.

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Consumer goods are intended for final use by individuals or households.

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Capital goods are manufactured goods used to produce other goods and services. These are used by businesses.

Services represent work that is performed for someone and is intangible.

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Productivity: is a measure of output produced by a given amount of inputs in a given period of time.

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There are 2 ways productivity increases:

1. When more output is produced with the same number of inputs.

2. When the same output is produced using fewer inputs. 44

Over time, productivity growth means that the average worker is producing more per hour, which means that the average standard of living in the economy will be higher.

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A good example might be washing cars.

Initially, someone might be able to wash 1 car in 1 hour.

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With some practice one of two things will happen.

What do you think they are?

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1. You might be able to wash 1 car, but in less time than it took before to wash 1 car.

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2. You might be able to wash 2 cars in the same time it used to take to wash 1 car.

Division Of Labor: When work is arranged so that individual workers perform fewer tasks than before.

A good example is assembly line production used by Henry Ford. 50

Specialization: As a task is divided into smaller steps, workers perform tasks that they are better suited for or can do more efficiently than others.

This is the opposite of self-sufficiency.

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Specialization has certain benefits which include;Taking advantage of individual differences in ability.

Learning by doing or practice makes perfect.

Saving time by not having to switch tasks.

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Human Capital: The sum of the skills, abilities, health and motivation of people. An investment in your education and training will boost your productivity, your income and finally, your standard of living. 54

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Economic Interdependence: When decisions made by 1 person affect decisions made by other people, or events in 1 part of the world affect other parts of the world.

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We are dependent on people in many parts of the world for things we need and they are dependent on us for things they need.

Opportunity Cost: The cost of the next best alternative use of money, time, or resources when one choice is made rather than another.

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Cost-benefit analysis: involves reaching a decision after considering alternative courses of action by comparing the extra benefits with the extra costs of that action as measured in small incremental steps.

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A tool called a decision making grid can be used to evaluate various alternatives.

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Let’s look at a few examples. What’s the benefit and cost for each decision?• Standing in line at McDonalds• College choices• Business decisions• Flood control programs

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Production Possibilities Frontier: A diagram representing the various combinations of goods or services an economy can produce when all resources are fully employed.

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The basic lessons we learn from looking at this model are:

All points on the curve are efficient.

We can’t produce outside the curve at a point in time because we don’t have enough resources.

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Movements along the curve involve an opportunity cost.

Points inside the curve are possible but inefficient.

An outward shift in the curve over time represents economic growth.

Incentives: A cost or benefit that motivates a decision or action by consumers, workers, firms or other participants in the economy.

Incentives matter! 69

Here are a few examples: 1. Prices2. Wages3. Interest Rates4. Profits5. Government Policies

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Economic system: An organized way of answering the what, how, and for whom questions every society must answer.

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1.Traditional Economy: What, how, and for whom questions are made through ritual, habit or custom.

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2. Command Economy: A central authority or government makes most of the what, how, and for whom Decisions.

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3. Market Economy: People and firms acting in their own best interests answer the what, how, and for whom questions.

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4. Mixed Economy: Also called a modified private enterprise economy. This is an economy where people carry on their economic affairs freely, but with some government intervention and regulation.

In reality, all economies around the world are mixed.

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Figure 2.1Comparing Economic SystemsFigure 2.1Comparing Economic Systems

Economic and Social Goals

Every society has a set of basic beliefs and goals they think are important. Keep in mind these goals are not universally accepted, nor are they in any particular order.

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Sometimes one goal may be compatible with another goal ,but at other times goals may conflict with each other.

1.Economic Freedom: People are free to make their own economic decisions such as who to work for or how to spend your income.

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2. Economic Efficiency: Means getting the most out of our limited resources so we can meet as many of society’s needs and wants as possible.

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3. Economic Equity: This goal stresses justice, impartiality, and fairness. Examples include equal pay for equal work and reducing discrimination.

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Minimum wage is one way the government tries to improve equity.

The idea of minimum wage supports the goal of economic equity.

With what other goals does it conflict?

It conflicts with the goal of economic freedom because businesses are not free to pay employees what they want. It may also conflict with full employment because minimum wage may lead to job losses. And finally, it may conflict with price stability because firms may raise prices in response to the increase in the minimum wage.

4. Economic Security: Provides protection against unforeseen events such as layoffs, illness or injury.

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Social security is one government program that provides security to most working people.

5. Full Employment: All available resources should be put to work so that society can meet as many needs and wants as possible. We want every person who wants to work to be able to find suitable employment.

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6. Price Stability: We want to avoid drastic fluctuations in the price level, or inflation. The reason is that certain groups of people are hurt by inflation.

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For example people living on fixed incomes don’t get raises that keep pace with inflation.

7. Economic Growth: The goal here is to be able to produce more goods and services over time. This is reflected in rising GDP from year to year.

Remember the pie!90

Capitalism or Free Enterprise has 7 importantcharacteristics

1. Economic Freedom: Same as above.

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2. Voluntary exchange: Buyers and sellers freely and willingly engage in market transactions and both parties expect to benefit from the transaction. It’s a win-win situation for both parties.

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3. Private Property Rights: These rights entitle people to own, use, and control their possessions as they wish. It provides people with the incentive to work, save and invest because they are the ones who reap the rewards. 93

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Examples include:• Real property• Intellectual property patentscopyrights

4. Profit Motive: The driving force that encourages people and firms to improve their material well being.

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5. Competition: The struggle among firms to attract consumers while lowering costs.

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Competition is important to a market economy because consumers get lower prices and better quality products.

6. Consumer Sovereignty: The consumer is the “ruler” of the market, ($ votes). Business firms must be sensitive to the needs and wants of consumers and try to make the best product at the lowest price in order to be successful.

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7. Government Regulation: Legal restrictions established by government on people and firms with which they must comply.

FDA EEOC EPAOSHA FTC FCC 99

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In Capitalism, governments’ role should be limited.

This is called laissez faire.

Protector a) false and misleading advertising.b) unsafe food and drugsc) environmental hazardsProvidera) National defenseb) Education

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Regulatora) preserve competition

with antitrust Laws.b) regulate industries

Promote National Goals

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Deregulation: Is the opposite of regulation. Here the government becomes less involved in people’s lives.