SOLUTION: Fundamental Economic Concepts | My Assignment Tutor

Notes: Fundamental Economic ConceptsLO1 Week 11. Economics – Is the study of how people try to satisfy unlimitedwants and needs through the use of scarce resources2. “There is no such thing as a free lunch”– Nothing is free– Someone must pay for free items3. Scarcity – The fundamental problem faced by all societies– Society may not have enough resources to produce all thingspeople want4. The Factors of Production:A. Land – gifts of natureB. Labor – PeopleC. Capital – tools, equipment– Financial Capital – money to purchase capital5. Entrepreneur – A person who takes risks for profit– They are often considered the 4th Factor of Production6. Technology – Many economists add this to the factors ofproduction– Technology includes any use of the land, labor, capital thatproduced goods and services more efficiently– examples – computers and robotics7. Each society must answer 3 basic economic questions:A. What to produce? Ex Tanks or cars?B. How to produce? Ex Robotic or by handC. For whom to produce? Ex Consumers, military, or export?8. People make bad economic decisions:A. Failure to make a budgetB. Not saving regularlyC. Failing to distinguish between wants and needsD. Failing to adapt your lifestyle to changed economic circumstances9. Ethical Foundations of Economics:A. Ethics – Consideration of right and wrongB. Is our commercial system based on “economics” or“greedonomics”?C. Ex of companies like Enron or people like Martha StewartD. Adam Smith – Father of modern Economics– appropriate to be self-interested but…– moral considerations generate self-restraint– greed is self-interest, without moral restraint– self-interest can advance interests of society– Sociability and Trust along with Competitive Markets and aSystem of Justice – creates conditions in which self-interestpromotes the broader interests of society10. There are several segments of Economics:A. Description of Statistics: GDP, unemploymentB. Analysis of Statistics: Why is gasoline expensive?C. Explanation of Economic Activity: How economies functionD. Predict Future Trends: economic forecastingE. Economic Ethics: values and economic decisions11. Trade-Offs: Exchanging one thing for the use of anotherEx – Time playing Xbox vs time studying12. Opportunity Cost: Value of next best alternativeEx – Homework or working at Wal-Mart13. The PPF or Production Possibilities Frontier:– illustrates opportunity cost– Diagram (next page) shows various combinations ofgoods/services an economy can produce when all productiveresources are fully employedGuns2 4 6 8 10Butter 10 8 6 4 2– Points along curve representmaximum output– Points inside curve represent idleresources– Points outside curve representeconomic growth– Frontier – maximum combination ofgoods/services that can be produced15. Needs vs Wants:A. Need – An item necessary for survivalEx – food, clothing, water, shelterB. Wants – A way of satisfying a needEx – need = food want = pizza16. Markets are Locations/Mechanisms that Allow for Buying andSelling:A. Factor Markets – Productive resources bought and soldB. Product Markets – Producers sell goods/services toconsumers17. The Circular Flow Diagram – Illustrates the flow of goods/servicesand money in a market system18. Markets have Evolved into Cyberspace – buyers and sellersinteract through computers without leaving their homes 19. A Market Economy – one in which consumers and businessesanswer the what, how, and for whom to produceOther terms – capitalism, mixed or free market economy* Economic Systems and Decision Making:1. Consumer Sovereignty – idea that consumers decide what will beproduced2. Economic System – Organized way of providing for the wants andneeds of society3. Economic Systems:A. Traditional – Customs and beliefs guide economic decisions– Advantages – Strong family ties, know what is expected of all– Disadvantages – Change is discouraged; few consumer goodsExample – Nomadic herders in MongoliaB. Command – The Government makes all decisions– Advantages – No career choices and few consumer goods– Disadvantages – lack of incentive to work; less inventivenessExample – North KoreaC. Market – Economic Decisions made by people– Advantages – individual freedom, competition, manyconsumer goods– Disadvantages – young and old excluded, prices change, slowto change– Example – United States4. Social and Economic Goals of the United States are:A. Economic Freedom – to buy and sell most productsB. Economic Efficiency – Use resources wisely, conserveC. Economic Equity – policies benefit everyone fairlyD. Economic Security – protection against layoffsE. Full Employment – everyone who wants a job has oneF. Price Stability – Little fluctuation, change over timeG. Economic Growth – economy over time will grow5. Trade-Offs Among Goals: sometimes goals conflictEx – raising minimum wage causes prices to go up6. Main Characteristics of a Free Enterprise (Market) Economy:– Economic Freedom – Choose job and employer– Private Property Rights – own and control property– Voluntary Exchange – Buyers and sellers act freely– Profit Motive – work to make money and not forced to work7. Competition – Sellers compete with one another to attractcustomers while lowering prices– Consumers compete with one another to find the bestproducts at the lowest prices8. Role of the Consumer – is to reject products or prices they don’tlike9. Role of the Government –A. Protector – of consumers ex impure drugs, etc..B. Provider – of goods and services, a consumerC. Regulator – of competition in market placeD. Promoter – of national goals* Comparing Capitalism, Socialism, and Communism*1. Pure Market Capitalism – Adam Smith said a market economywas largely self-regulating and didn’t require governmentinvolvement (laissez-faire)A. based on prices, profit, private propertyB. Government’s Role is limitedC. Individuals answer all economic questionsExample – United States– Pros of Market Capitalism:– consumer satisfaction– Freedom to choose– Producers supply what consumers want– Cons of Market Capitalism:– Ignores public goods– produce only for those who demand– allows for businesses to fail, have unemployment and lessproductive resources2. Pure Socialism – Arose from dissatisfaction with living andworking conditions during the Industrial RevolutionA. The State owns most factors of productionB. There is very little private propertyC. Prices are set by the Statea. Democratic (market) Socialism – works in elected frameworkex – Englandb. Authoritarian Socialism – central government controlseconomyex – China– Pros of Pure Socialism:– people use election power– Addresses for whom directly– Cons of Pure Socialism:– Government guarantee of jobs– little labor mobility– high taxes3. Communism – Karl Marx’ “Communist Manifesto” (Das Kapital)– Series of class struggles would eventually result in collectiveownership of all capital (property)– Proletariat – workers– Marx envisioned – Socialism as the stepping stone tocommunism– Example – North Korea– Pros of Communism:– all workers are equal– no job uncertainty– centralized control and planning– Cons of Communism:– no individual freedom– no incentive to work– little consumer satisfaction– few day to day changes4. Summary of Capitalism, Socialism, and Communism: Under…….Prices are set by…..Factors of production are owned by……..Economic decisions are made by…….CapitalismSupply and demandPrivately owned/operatedConsumers, govt, andbusinessesSocialismGovernment, supply/demandGovernment and the peopleGovernment and businessCommunismGovernmentGovernmentGovernment and planningcommittees * 3 Theories:– Everyone has their opinion as to how the economy should operate.1. Classical2. Keynesian3. Monetarist1. Classical:– Key premise: Competition is best for the market.– Competition creates better, cheaper products, more choices.– Supply creates wealth.– Smith’s “invisible hand”– Encourage trade– Oppose excessive taxation– Stop monopolies, collusion and unions as they blockcompetition.* Examples of classical theorists – Adam Smith, Ricardo,Tea Party, Ron Paul, Conservatives, libertarians, etc..2. Keynesian:– Key Premise: Competitive markets are flawed and cannot stayin balance.– Prices go up quickly but do not fall quickly– Full employment and production will not last– Gov’t must repair constant recessions.– Slow inflation with tax increases and cut government spending.– Create demand during a recession by tax cuts and increasedgovernment spending.– Safety nets-social security, unemployment, minimum wageprograms* Examples of Keynesians – Keynes, democrats, Obama, Bush, Clinton,liberals3. Monetarists –– Key Premise: Non-political fine tuning is best for the economy.– Politicians won’t raise taxes but they will cut them.– Central banks think long run, not next election.– Use interest rates to encourage spending or saving.– Provide stable currenciesKey Economic Terms:1. Consumer Goods – intended for final use by a consumerEx – toaster, book, etc.. (go to Wal-Mart)2. Capital Goods – a good used to make another good3. Durable Goods – Lasts more than 3 yearsEx – house, car, etc..4. Non-Durable Goods – lasts less than 3 yearsEx – tires, pens, etc…5. Services – work performed for someone else6. Consumers – people who use goods to satisfy wants7. Conspicuous Consumption – use of a good to impress othersEx – Rolex watch, designer purse8. Value – worth in dollars and cents9. Economic Value – how much it is worth in market place10. Wealth – sum of all products in value11. Utility – the capacity of an item to be useful12. Paradox of Value – items of little value (water) but necessary forsurvival, have less value than a want (diamonds)13. Specialization of Labor – workers concentrate on a task theyspecialize in14. Human capital – the sum of all skills, talents, abilities and healthof people15. Cost/Benefit Analysis – what you gain for what you give up16. Economic Interdependence – idea that actions of one country orstate impact what happens elsewhere