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Scarcity
Resources All the things people can use to make
goods (products)▪ Goods include: food, clothing, houses,
furniture, cars, computers, etc. Most resources are limited , scarce
Allocate to distribute
Opportunity Cost
Trade-off people gain something, but they also give up
something The thing you give up by making a choice is
called the opportunity cost▪ Always marginal benefits to be greater than marginal
cost▪ Value of the next best alternative you could have
chosen (given up) Economics
Study of how and why people make choices about the allocation, or distribution, of resources
Types of Productive Resourcesaka Factors of Production
Land (natural) Not only the land itself, but all the natural resources of the
land, as well as any improvements people have made to the land
Capital Physical Capital▪ All the tools, machines, and other equipment a business needs
Human Capital▪ Skills and knowledge of a company’s workers
Labor Process of making things, the mental & physical efforts of
human workers Entrepreneur
Person who starts and manages a business
Rational Decisions
Rational Decisions Cost-benefit analysis▪ Marginal benefit▪ What you gain from decision
▪ Marginal Cost▪ What you give up from the decision
MB > MC = you have made a rational decision
Specialization & Voluntary Exchange
Voluntary exchange Mutual agreement between different parties
Specialization Doing just 1 thing (1 job, producing 1 item,
selling 1 product) Productivity
Efficient use of resources Division of Labor
Different workers do different parts of the job making
The 3 Basic Questions
What should we produce? How should we produce it? For whom should we produce it?
Economic Systems #1
Command Economies The government makes all basic
decisions Doomed to fail because▪ Can 1 committee do it all? NO▪ Inefficient▪ Shortages & resources were wasted
Economic Systems #2
Market Economies Based on private ownership▪ Private individuals & companies control the resources▪ Supply & Demand▪ Shows the distribution of goods & services determined by prices
Competition is driving force▪ Consumers—people who buy things & compete to buy
scarce products▪ Producers—people who sell things & compete to sell the
products people want most, driving down prices. AKA Capitalist or Laissez-faire▪ French word that means “to leave alone”▪ Government does not interfere with free markets
Economic Systems #3
Mixed Economies Most economies are based on various
combinations of market forces & government interventions
The Role of the Government
1) Protecting Property Rights & Contracts Legal rights of producers & consumers must
be protected Exchange of goods & services depends on
contracts, legal documents, between buyers & sellers
Government protects▪ Ideas, intellectual property▪ Patents for new inventions and medicines▪ Copyrights for books, songs, and creative works
The Role of the Government
2) Providing Public Goods & Services Private Goods▪ When you pay the entire cost of a
good/service and you receive all the benefits Public Good▪ When you pay taxes on a good/service and
the benefits are shared by everyone in society
The Role of the Government
3) Redistributing Income Transfer payments▪ money payments made by governments for
which no services are required in return▪ Done by collecting taxes from wealthy citizens to
make transfer payments to poor, disabled, and elderly citizens
▪ Examples:▪ Welfare benefits in cash, food stamps, low-income
housing, Medicaid benefits, unemployment benefits, Social Security retirement benefits, Medicare
The Role of the Government
4) Promoting Competition Free competition between producers
keep prices low and quality high Congress has passed antitrust laws
(laws that prevent the formation of monopolies) ▪ Monopoly market structure in which one
company has control over production and prices▪ Trust is a group of companies that combine
their resources in order to control production & prices. ▪ Been illegal in the US since 1890
The Role of the Government
5) Resolving Market Failures Market failure occurs when a private
company benefits from production for which other people end up paying some of the costs
6) Effects of Regulation & Deregulation Regulation—using laws to control what
businesses can do▪ Purpose: to increase public benefit & decrease
negative consequences of market system Deregulation—when government stop
regulating a particular industry
Economic Growth
Occurs when a society is able to produce more things that people want & improve its members’ standard of living
In order for an economy to grow, it must increase its productivity by producing more output (products) per each unit of resources they use, or their input
Productivity = output of products
input of resources
Capital Investment
Key to economic growth is capital investment Using some of an economy’s profits to: ▪ buy new machines and equipment ▪ to research and implement new technologies▪ Improve education of the workplace
Making Capital Investments
To increase productivity and profits in the future Invest in capital goods (new equipment)
or human capital (more training)