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A) Definition: Economics of how individuals and societies choose to use scarce resources to produce goods and services and to exchange them in order to satisfy wants for consumption. It explains how these resources are allocated among competing ends by the economic system
1) Scarce Resources (Scarcity)-how limited goods are compared to people�s desires. Economics is based on a world where things are scarce. The fact that an item has a price proves that it is scarce. (Coke as opposed to tap water)
2) Want vs. Need-all needs are wants. The difference is based on a person�s value judgment. People�s wants are based on different things and these wants can never be satisfied. There are always tradeoffs with wants (You have o pick one over the other).
3) Resources-raw materials used in production (Factors of production, inputs) All resources are scarce. Resources are versatile, meaning they can be used for many things. Resources are combined in many different ways to produce different goods and services. (Look at #4)
a) Human Resources (Human Capital)-labor and entrepreneurial ability.
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Population (Adult non-institutional people older than 16) |
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Labor Force People ready, willing, & able to work |
Not in Labor Force � Full Time Students � Retired People, Rich � Homemakers � Sick People |
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Employed (Underemployed) |
Unemployed (Discouraged workers) |
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����� - Employed doesn�t necessarily mean that you have as much work as you want. These people are underemployed. Someone who stops looking for jobs is called a discouraged worker. Due to these two factors unemployment rates are inaccurate.
����� -LFPR (Labor Force Participation Rate) expresses labor force as percentage of population.
����� -Unemployment Rate-unemployed population as percent of labor force. These numbers reflect quantity not quality.
b) Non-Human Resources
1) Natural: For example-oil.
2) Man-made: Fro example-capital (Physical and not money like equipment)
4) Goods and Services- (The final product) they are produced from resources, thus if resources are scarce then they are too. Utility is the ability of a good to satisfy a want.
5) Choose (Decisions on what to buy are based on utility and cost because incomes are finite)
a) What (goods and services) to produce
b) How to produce- methods of production
c) For whom to produce: income distribution
6) Opportunity Costs: the forgone value of the next best alternative.
a) Forgone earnings- earnings you gave up by picking one thing over another.
b) *Costs vs. Benefits
Ex: going to college Cost: Forgone earnings, supplies, tuition
Benefit: Extra income after graduation, educated person (benefits are not just monetary)
*There is a complication with measuring this because of time. Money that you get today (Present value- is the value of money today) does not equal money that you get in the future because of interest and investing. (Rule of 70- you use this rule to find out how many years it will take for your money to double at the current interest rate. You take 70 and divide it by the current interest rate and that�s how many years it will take to double)
7) Allocation: the apportionment of scarce resources to specific productive uses or a particular persons or group.
a) Production Possibilities Curve (Frontier)
1) Full employment- all resources are working
2) Full production- all resources are in their most productive use
3) PPFs show the opportunity costs of different goods and services and help choose what to produce. The PPF shows the maximum amounts of the production that can be obtained by the economy in the current state.
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Every point along the curve (A-F)
represents full employment of all resources efficiently, representing
Productive Efficiency. At these points,
you can�t produce more of one good without producing less of the other. Any
point inside the curve represents underproduction and/or under-employment (blue
area). Any point outside the curve is infeasible in the current economic
situation (gray area). Any point up and to the right is better than the current
point.
Points A & F are practically impossible, but theoretically attainable. They are impossible because you can�t produce all consumer or all capital goods.
The PPC shows the opportunity costs for increasing the production of a good. If you are on the curve at point C and you want to produce one more butter (Point D), the opportunity cost is 2 guns.
4) How is the PPC position determined?
a. Command System: someone in charge decides what to produce in what quantities. (USSR)
b.� Market System: Supply & Demand, or market, decides. No government intervention (US closest) [No country today truly has a market economy. US influences market by levying taxes, and placing laws ex. Anti-trust Legislation]
c. Shifts in PPF
�� Country A invested in capital goods (Concentrating on the future) so after a period of time the PPC shifted outwards a lot. On the other hand Country B invested less in capital goods and more on consumer goods (Concentrating on the present), thus after a period of time the PPC only shifted outwards a little.
In the first diagram the PPC shifted outwards, but more for Good Y then Good X. The reason for this could be that there was a technological advance, which effected the production of Good Y more then the production of Good X.
In the second diagram illustrates a shift of the PPC of food vs. clothing from 1975 to 2003. Between these years the average income went up. The question now is: where will point A shift to B, D, and C? The answer is D because the food that one eats when one makes more money will not change (Its harder to increase the resources of food because one of the resources is land), however, the amount of clothes one buys will (Easier to increase the resources needed).
B) There are two parts of economics, Macro & Micro.
1) Macroeconomics: Analysis dealing with the behavior of the economy as a whole with respect to output, income, the price level, foreign trade, unemployment, and other aggregate economic variables. It is the big picture of how the economy is doing as a whole. Examples are: GDP (Gross Domestic Product), Inflation, PPFs.
2) Microeconomics: Analysis dealing with the behavior of individual elements in an economy � such as the determination of the price of a single product, or the behavior of a single consumer or business firm. It includes how individual firms make decisions.
C)� Fallacies:
1) Ceteris Paribus- This is when you forget to hold everything else constant when analyzing something in economics. (Ceteris paribus literally means that a factor under consideration is changed while all other factors are held constant or unchanged. Here we are specifically talking about the fallacy involved)
2) Post-Hoc (False Cause)- (�After this, because of this�) This fallacy arises when it is assumed that because event A precedes event B, it follows that A causes B. (Meaning you think that because A came before B it caused B when they might not be related at all)
3) Fallacy of Composition- This is the assumption that what it true for a part is also true for the whole and vice versa. Ex. If one person stands up in a crowd he can see better, but if everyone stands up, they can�t all see better.
D) Fact & Opinion:
1) Positive Economics- Describes the facts of an economy, and explains the economy in measurable terms.
����������������� There are certain assumptions involved in measuring economics. A simplifying assumption only makes things easier to understand. A necessary assumption is one that is used to uphold a theory. Without this type of assumption, the theory will collapse.
����������������� Economists use a model to predict how the economy will change. There are different indicators used in predictions. Leading Indicators are things that happen before the economy changes. (Ex: # of building plans applied for indicate how many buildings will be built) Concurrent Indicators happen as the change occurs. (Ex: Unemployment Rate) Lagging Indicators happen after the change. (Ex: New Hires-If you�re in a recession and the economy starts to pick up, you don�t hire new workers until you are sure the economy will continue to pick up and stabilize)
2) Normative Economics- Involves value judgments, and cannot be tested by scientific method. (What should be)
II) Markets & Government in a Modern Economy
A) What is a Market?
1) Not Chaos, but Economic Order
a) In a market economy, no single individual or organization is responsible for production, consumption, distribution, and pricing.
b) The market is a place were buyers and sellers come together to set prices and exchange goods and services.
c) Price represents the terms on which people and firms voluntarily exchange different goods and services. Prices also act as signals telling consumers when to buy and firms when to sell. A market equilibrium represents a balance among the different buyers and sellers. The price at which buyers want to buy the same amount of a good, or service, as sellers want to sell yields an equilibrium of supply and demand.
2) How Markets solve the Three Economic Problems
a) Markets solve the three economic problems of what, how, and for whom by matching sellers and buyers.
i) What: What is produced is determined by the �dollar votes� of consumers. By choosing to buy something you are telling firms to produce more of that product. This happens because firms want to maximize profits, which are net revenues or incentives.
ii) How: In the markets system companies produce goods in the cheapest and most efficient way possible.
iii) For whom: The for whom is decided by the markets of factors of production. The people who have the best land or skills etc. will make the most money. These people have the highest incomes and therefore the market produces for them (They are the most capable to buy).
3) Monarchs of the Marketplace
a) In a market economy the dual monarchs of the economy are tastes and technology. These things direct the resources of society. Business costs and supply decisions, as well as consumer demands, determine what is produced.
4) A Picture of Prices and Markets (Look at Page 29 in the textbook-its just a diagram summarizing what we did so far)
5) The Invisible Hand
a) Adam Smith discovered a remarkable property of a competitive market economy. Markets will squeeze as many useful goods and services out of the available resources as is possible. By pursuing his own interests a person in effect promotes the market system. But where monopolies or pollution or similar market failures become pervasive the remarkable efficiency properties of the invisible hand may be destroyed. (Pollution causes you not to be able to produce in the most efficient ways)
B) Trade, Money, and Capital
1) Trade, Specialization, and Division of Labor
a) An advanced economy is characterized by an elaborate network of trade, among individuals and countries, that depends on great specialization and an intricate division of labor.
b) In order to increase efficiency a system of specialization and division of labor develops. This allows people to concentrate on doing one thing and do it well.
c) Goods and services produced are then traded on individual and national levels to satisfy the wants and needs of the people.
2) Money: The Lubricant of Exchange
a) Money allows people to trade different goods and services easily. It is a universally accepted trade medium and therefore simplifies trade. If not for money it would be very hard to trade. Ex: If you wanted pizza, you would have to figure out which good the pizza shop owner would want or be willing to trade his pizza for. However, problems can arise with money such as inflation. (When inflation occurs people try to spend their money quickly instead of investing in the future)
3) Capital
a) Capital-a produced factor of production, a durable input which is itself an output of the economy.
b) Use of capital is often time consuming and therefore requires an initial investment.
c) Capital and Private Property
i) In a market economy capital is usually privately owned, and the income from capital goes to individuals. However, the right to use private property is always limited (Property rights are limited). The ability of individuals to own and profit from capital is what gives capitalism its name.
C) The Economic Role of Government
1) Efficiency
a) Governments increase efficiency by promoting competition, curbing externalities like pollution, and providing public goods.
b) Perfectly competitive markets will produce an efficient allocation of resources, so the economy is on its PPF. Perfect competition causes firms to produce those outputs that consumers most desire using the most efficient techniques possible.
c) Imperfect competition occurs when a buyer or seller can affect a goods price. This will cause an economy to move inside the PPF, increase prices, and decrease production (Monopolies). In a monopoly, for example, there is no competition and so the seller can charge whatever he wants. For this reason governments sometimes regulate monopolies or other factors that would cause imperfect competition.
d) Externalities (or spillover effects) arise when activities impose costs or benefits which are not paid for by the marketplace (Outside the marketplace). Governments pass regulations to stop negative spillover effects, like pollution, which cause the costs of factors of production to go up because certain efficient and cheap techniques can no longer be used.
i) Public Goods: A commodity whose benefits are individually spread among the entire community regardless of individual desires. Because this doesn�t follow the normal rules of supply and demand (They can�t be bought in a market) private firms are usually unwilling to produce them. The government then steps in to promote their production.
a) Taxes: The government uses taxes to pay for the production of public goods. Taxes are negative incentives for people to buy or not buy things. (The biggest incentive, however, is price)
i) Sales tax-makes you buy less.
ii) Excise tax-a tax on a specific good.
a) Sin taxes-excise taxes, which discourage you from buying the product-like cigarettes.
iii) Income tax-encourages a person to earn less, so they will pay less taxes.
2) Equity
a) Markets are not necessarily producing a fair distribution of income. Governments can alter the pattern of income generated by the market using taxation for income support programs. (There are different types of tax rate that can support income support programs: Proportional rates-everyone pays the same percentage of their tax base. Progressive-the larger he tax base the bigger the percentage [This is what we have]. Regressive-the larger the tax base the smaller the percentage)
3) Macroeconomic Stability
a) Since the 1930s governments have been using fiscal powers (Power to tax and spend) and monetary policy (Supply of money and interest rates) to increase the rate of economic growth and development for the long run. Governments have succeeded in curbing the worst excesses of inflation and unemployment using these policies. Nothing is a market economy because governments are involved using these policies (Mixed economy).
4) Twilight of the Welfare State
a) Governments role in markets can be both positive and negative. There are many debates about this topic.
