Economics: Scarcity and Wealth

• Economics explores choices.

Scarcity

• Scarcity arises from insufficient space or resources, particularly impacting those in poorer areas.
• Limited resources cannot fulfill everyone's desires, illustrating scarcity.

Goal of Economics: Increasing Wealth

• On an individual level, the goal is personal enrichment.
• On a societal level, the goal is to enrich the entire society.
• Wealth is subjective, varying from materialistic desires to well-being.
• Individual goals involve maximizing personal satisfaction.
• Societal goals aim to maximize the betterment of society.

Economic Reasoning

• It involves strategically increasing wealth.
• Resources are factors of production used to fulfill human wants and needs.

Capital

• Human capital refers to labor, workforce knowledge, and skills that students can leverage due to knowledge scarcity.
• Physical capital includes capital and goods like robotic arms, which drives car creation.
• Natural resources encompass land and resources not human-made, like wood.

Entrepreneurship

• It involves gathering resources with a unique idea, taking risks to create profit, and potentially facing market rejection.
• Labor, land, and capital are key factors, besides entrepreneurship.
• Money and time are not resources in this context.
• Scarcity cannot be eliminated or dealt with.
• Scarcity appears when a choice is needed.

What Isn't Scarce

• Undesirable items like garbage or pollution, are not scarce because no one wants them.
• Poverty means people face scarcity, but not all who face scarcity are poor.
• Scarcity means unlimited wants, and will always be present due to population growth and unlimited human desire
• Rareness is when something such as a disease can be considered rare.

Managing Scarcity

• Maximizing resources is the goal of economic reasoning.
• Strategies include doing without, prioritizing, creating more resources and eating less
• Waste reduction leads to efficient resource use via recycling and minimizing waste.
• Redistribution involves sharing excess resources through food drives or taxes.

Marginal Analysis

• It means thinking at the margin with the question "Is it worth it?"
• Evaluate if something is worth doing at all, considering potential benefits from not perfecting it, knowing when to stop, and looking forward.

Marginal Cost/Marginal Benefit Analysis

• It compares the added benefit of a product unit to its additional opportunity cost.
• Marginal refers to additional or difference.
• Weighing the marginal benefit like more fries, versus the marginal cost, such as forgoing an alternative purchase is an example
• Scarcity leads to not being the best at every task.
• Analysis involves assessing benefit and opportunity cost differences to see if the marginal benefit outweighs the marginal cost.

Marginal Principle

• The marginal principle dictates how far to pursue an activity, considering resource opportunity costs.
• Marginal benefit and cost have an inverse relationship; eventually, cost surpasses benefit.
• As consumption increases, additional unit utility decreases, showing diminishing returns.
• Adding more of one resource to a fixed resource eventually reduces output.
• Continue until the marginal benefit equals the marginal opportunity cost.

Sunk and Marginal Costs

• Sunk costs are unchangeable past expenses and should not influence decisions.
• Marginal cost relates to future expenses.

Trade

• Trading increases wealth because people subjectively and differently evaluate goods and services.
• Trade occurs when parties expect to gain more than they give up, aligning with cost-benefit principles.

Voluntary Exchange

• It boosts wealth as parties value exchanged assets higher post-exchange.
• Mutually beneficial exchanges create wealth.
• Voluntary exchanges, by nature, are mutually beneficial.
• Lack of information, misinformation, or asymmetric information can impede successful trade.
• Employment and education are forms of voluntary exchange, offering mutual gains.
• There is "deadweight loss" and transaction costs, which include searching, arranging, and agreeing to exchange terms represents and no one gains.

Money

• Money eases exchange of resources for goods/services
• Reduces transaction costs by eliminating the need for coinciding wants.

Circular Flow of Economic Activity

• The economy functions as a constant cycle of goods, services, resources, and money.
• Economic interdependence arises from each part relying on another, such as businesses, households, and government.

Circular Flow Model

• The marketplace encompasses all places where buying occurs.
• The factor market handles resources like labor, land, human/physical capital.
• The product market is where finished goods/services are sold.
• Households contribute resources for income.

Government Role

• Transfer payments aid those lacking basic needs.
• Subsidies incentivize companies to lower prices, ensuring company profit.
• Federal expenditures mainly cover goods, services, security, and welfare.
• Transfers occur to state and local levels.
• Taxes, mainly from personal income, corporate, and social security, fund federal expenses.
• Governments often spend beyond their means.

Circular Flow

• Circular flows involve global economies.
• Economies interact by trading goods/services and lending capital.

Global Flow

• Households and firms participate in global markets for goods and finance.

Market System

• It is Driven by self-interest, profit, and competition, the goal is wealth maximization through efficient production and exchange.

Economic Systems

• Economic systems determine production and exchange control.
• Tradition relies on inherited practices.
• Command economies are government-controlled.
• Market systems allow individual choice for societal benefits and wealth optimization.
• A market exists with willing buyers and sellers.

Market Components

• Property rights, incentives, exchange, competition, and economic freedom are components of a market (PIECE).
• Legal ownership grants resource control and freedom, like in home improvements.
• Incentives motivate behavior through benefits or costs.
• Voluntary asset exchange enriches parties and requires ownership.
• Goods/services are available for monetary exchange.

Competition

• Multiple sellers aim to offer better value, creating competition.
• Buyers choose among alternatives.
• Independent choices for buyers/sellers indicates economic freedom.
• Trading happens without government intervention in a truly free economy

Feudalism

• It lacks property rights, production resources, and innovation.
• Land is not sold but forms a social hierarchy.
• Lords can't sell land, but land ownership dictates status passed to the oldest son.
• No labor market exists; peasants are tied to the land as serfs.
• The plague reduced the European population by ⅓ in the 14th century, which led to workers gaining bargaining power and a labor market emerged.
• Workers gained power, allowing them to negotiate benefits from nobles/leaders.

Adam Smith

• Adam Smith (1723-1790) viewed profit as a motivator and competition as a regulator, while also writing "The Wealth of Nations".
• Profit motivates; self-interest in resource sales drives job motivation.
• Competition regulates, correcting high prices or low quality through competitor interest.

Entrepreneur

• Entrepreneurs drive markets by combining resources, taking risks in innovation, keep all profits for themselves
• The invisible hand, results from self-interest and competition, not government regulation, but rewards efficient parties.
• The results lead to societal satisfaction with goods, quantities, prices, and profits.

Government Role

• To provide a legal system and enforce property rights and public goods such as those individuals/businesses wouldn’t offer.
• Correct market failures, such as external costs/benefits, and intervene when needed.
• Externalities cause market failures and can be negative like costs for non-participants or positive like benefits.
• They also undermine the incentive system if behaviors aren't incentivized.
• Governments maintain competition by regulating monopolies, redistributing income via taxes, and stabilizing the economy by lowering unemployment and inflation, and promoting economic growth.

Comparative Advantage

• Comparative advantage forms the basis for specialization and trade.
• Specialization involves focusing and trading for other specialized products.
• The U.S. trades with China due to its large, compliant workforce.
• Specialization leads to increased overall benefit for trade partners, as both parties will be better off.
• Scale of analysis ranges from individual, social, global, to universal impacts.
• Globalization integrates the international economy.
• It unites countries into one global community through trade, investment, labor, and technology flow.
• The U.S. and Western nations promote open trade, financial flows, and democracy.

Forces of Change

• Military, political, economic, and technological changes influence globalization.
• Geographical/political borders are less relevant to economic exchange.

Globalization Eras

• The first globalization occurred with Columbus's discovery of America in 1492.
• The second involved the rise of multinational corporations.
• The third is driven by technological advancements that diminish distance.
• The fourth era is the global supply chain.

Actors in a Globalized World

• Nation-states, multinational corporations (MNCs), intergovernmental organizations (IGOs), and nongovernmental organizations (NGOs) are actors in this new world.
• Other actors include the internet and terror/criminal networks.
• Globalization is facilitated by various organizations.
• These groups stem from negotiated treaties with rules that countries must follow.
• GATT, or General Agreement on Tariffs and Trade followed WW2 with the goal of encouraging free trade and became WTO in 1993.
• The World Trade Organization (WTO) generally supports free trade, governments negotiating trade agreements, operates to remove trade barriers and tariffs.
• The International Monetary Fund (IMF) manages currency exchange, ensuring stability, and provides loans conditional to free trade.
• The World Bank reduces poverty while prioritizing free trade, led by a U.S. citizen.
• USMCA (NAFTA) is a free trade agreement since 1993 between the United States, Mexico, and Canada.
• Business supports, but labor and environmental groups oppose these agreements for various reasons.
• Employment increases through globalization, questions arise about labor practices and conditions.