Fundamental Concepts

The fundamental problem that all societies face is called _________________.

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

Because Resources are ___________________. But Wants are ______________________.

Economics: is the study of how people and nation’s try to satisfy their unlimited wants through the careful use of limited resources.

Economics is sometimes called, “__________________________”. Why?

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

Society’s needs and wants are satisfied by combining various resources into finished _________ and ________________. Examples include food, clothing, shelter and transportation.

TINSTAAFL— Stands for, there is no such thing as a free lunch.

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.

Society must make ________________about how to use its scarce resources.

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

They are; 1. __________ to produce 2. __________ to produce . 3. _______________ to produce.

Resources: can also be called ___________________ or ___________. They are the building blocks necessary to make the goods and services which in turn satisfy needs and wants.

These resources can be classified in 4 ways.

Figure 1.2Figure 1.2Figure 1.2

1.Land: also called _______________ or _______________ which occur naturally without human effort.

Examples include fertile soil, sunshine, wind and animals.

1. Labor : includes all people with their ___________, ______________ and ____________ brought to the workplace.

Examples include teachers, construction workers, policemen, factory workers and nurses.

2. Capital : represents the ________, _______________, _____________ and factories used to produce other goods and services.

This is not the same thing as financial capital or money.

Capital goods are critical to our nation’s ability to produce more. This is called __________________.

Examples of capital include hand tools, commercial ovens, cranes, fork lifts and computers.

3. Entrepreneurship : this is the _______________ in search of profits. These are people who start new businesses or come up with new ways of doing things.

examples include

_______________ ______________ _____________ ________________

_______________ ______________ _____________.

Gross Domestic Product: is the _________ value of all ________ goods and services ___________ within a nation’s ____________ in 1 year.(Think of GDP as a big pie.)

GDP is the best measure of how much our economy can produce. As GDP continues to grow, it affects our standard of living.

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

How big a slice of pie will you get? What will determine the size of your slice?

Economic Growth: when a nation’s total output of goods and services ___________ over time. This means the pie is getting bigger.

How big do you think our pie is today in dollar figures?

Factors that contribute to growth include the following.

1. _______________________ 2. ____________________________

3. _______________________ 4. ____________________________

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

HaitiUnited StatesIndiaGermany

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

Goods can be divided into consumer goods and capital goods.

Consumer goods are intended for use by _____________ or _______________.

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

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

Many times when we buy something we are getting a good and service at the same time.

Productivity: is a measure of output produced by a given amount of inputs in a given period of time. This is the key to our modern standard of living.

There are 2 ways productivity increases like 2 sides of the same coin.

1. When _______ output is produced with the ________ number of inputs.2. When the ________ output is produced using _________ inputs.

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.

A good example might be washing cars. Initially someone might be able to wash 1 car in 1 hour. With some practice one of two things will happen.

What do you think they are?

1. You might be able to wash 1 car, but in less time than it took before.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 ____________________ than before. Ex. Assembly line production.

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

This is the opposite of _____________________.

Specialization has certain benefits which include;

1. Taking advantage of individual differences in ability.2. Learning by doing or practice makes perfect.3. Saving time by not having to switch tasks.

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

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

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 ________________ alternative use of money, time or resources when one choice is made rather than another.

Opportunity cost focuses on what you give up in order to get something else.

Cost-Benefit Analysis: involves reaching a decision after considering alternative courses of action by comparing the ________________ with the _________________ of that action as measured in small incremental steps.

A tool called a ____________________ can be used to evaluate various alternatives. The following chart illustrates the process used by individuals, firms and government when trying to make the best choice.

Let’s examine a few examples. What is the benefit and cost for each of the following decisions?1. Standing in line at McDonalds.

2. College choices.

3. Business decisions.

4. Flood control programs.

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

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

1. All points on the curve are ___________________.

2. We can’t produce outside the curve at a point in time because ____________________________.

3. Movements along the curve involve an ________________________.

4. Points inside the curve are possible but ______________________.

5. An outward shift in the curve over time represents ______________________.

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

Here are a few examples;1. Prices2. Wages3. Interest rates4. Profits

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

Look at figure 2.1, pg 38 for the advantages and disadvantages of each economic system.

1. Traditional Economy : What, how and for whom questions are made through __________, _________or _____________.

Examples include the African Mboti, Australian Aborigines and Canadian Inuits.

2. Command Economy : a ____________________ or government makes most of the what, how and for whom decisions.

Examples include Cuba, North korea, China and the former Soviet Union.

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

Examples include Canada, Japan, South Korea, Hong kong and the United States.

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 ________________ around the world are mixed.

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. Sometimes 1 goal may be ____________ with another goal, but at other times goals may ___________ 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 their money.

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.

3. Economic Equity : this goal stresses justice, impartiality and fairness. Examples include equal pay for equal work and reducing discrimination. _______________ is one way the government tries to improve equity.

Figure 2.1Comparing Economic SystemsFigure 2.1Comparing Economic Systems

4. Economic Security : provides protection against unforeseen events such as layoffs; illness or injury. __________________ 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.

6. Price Stability : we want to avoid drastic fluctuations in the price level, or _____________. The reason is that certain groups of people are hurt by inflation. For example people living on _______________ don’t get raises that keep up with inflation.

7. Economic Growth : the goal here is to be able to produce ________ goods and services ______________. This is reflected in rising GDP from year to year.

Remember the pie!

Capitalism or Free Enterprise has 7 important characteristics. You will notice some overlap with the previous list.

1. Economic Freedom : same as above. 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 ____________________ for both parties.

3. Private Property Rights : these rights entitle people to ______, ______ and ________ 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.

Examples include real property like your house and also intellectual property which includes patents and copyrights. 4. Profit Motive : the driving force that encourages people and firms to improve their

material well being.

5. Competition : the struggle among firms to attract consumers while lowering costs. Competition is important to a market economy because consumers get _______________ and ____________________.

6. Consumer Sovereignty : the consumer is the “_________” 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.

7. Government Regulation : legal restrictions established by government on people and firms.

In capitalism governments’ role should be limited. This is called _______________.

The governments’ role includes 4 key areas.

Protector False and misleading advertising-FTC Unsafe food and drugs-FDA Environmental hazards-EPA Product safety-CPSC

Provider National defense Education Parks Police and fire

Regulator Preserve competition with antitrust laws Regulate businesses

Promote National Goals These were the 7 goals mentioned above