Economics Unit 1: Scarcity and Choice

Unit 1: Scarcity and Choice

• Scarcity: Wants exceed available resources.
• Opportunity Cost: The value of the next best alternative forgone when making a choice.
• Trade-offs: Giving up one thing to gain something else.
• Economics: The study of how people make choices in a world of scarcity.
• Thinking like an Economist: Analyze costs and benefits, incentives, trade-offs, and unintended effects.

Cost-Benefit Analysis

• Incentives: Motivate behavior by encouraging desired actions or discouraging undesirable ones.
• Trade-offs: An exchange involving gain and loss
• Opportunity cost: The cost of a choice, measured in terms of the next best alternative.
• Unintended Effects: Unforeseen consequences of an action

5 Decisions

• Example Decisions: Choices were made on breakfast, dinner, exercise, and homework
• Opportunity Cost: The perceived cost of each decision, including time, money, effort. Choice #1 - the cost of not making breakfast.

Factors of Production / Resources

• Natural Resources: Materials provided by nature
• Labor: Human effort used in production
• Physical Capital: Tools, machines, and other manufactured goods used in production
• Human Capital: The skills and knowledge of workers
• Technology: The knowledge and methods used to produce goods and services

Economics Systems

• Command Economy: Centrally planned economy, where government controls the allocation of resources.
• Mixed Economy: Combines elements of market and command economies
• Market Economy: Decentralized economy, where prices and private decisions drive allocation.

Theory of Value

• Theory of Value: All the value of production comes from labor
• Labor Cost: Value of labor in relation to the price of goods.
• Surplus Value: The difference between the value that produced the good and the subsistence wages paid to workers
• Democracy: Keeps those in power in check.

The Evolution of the Modern Capitalist System

• Adam Smith: Key figure in understanding capitalism and the nature of wealth
• Wealth of Nations: Book by Smith explaining capitalism, productivity, efficiency, and free markets
• Self-interest: Drives individuals to improve their lives & seek success in a market
• Law of Competition: Best products for lowest price are the ideal outcome of a capitalist system, where competition drives innovation

Advantages to Capitalism

• Efficiency: Capitalist systems often lead to the most efficient way of producing a good for a given set of resources
• Variety: Capitalism leads to variety by encouraging competition
• Freedom* Individuals have freedoms to make choices

Disadvantages to Capitalism

• Inequality: Different people will achieve vastly varying levels of success
• Instability: Market failures can cause unpredictable periods
• Market Failures: Capitalist systems can fail to produce optimal results
• Monopolies: A single firm controlling a market eliminates competition, leading to higher prices.
• Public Goods: Goods that are difficult to exclude others from consuming.

Production Possibility Curve

• Production Possibilities Curve: A graphical representation showing all possible combinations of two goods that can be produced.
• Scarcity: Shown on production possibilities curve by goods not being able to be produced at the same time.

Globalization

• Isolation to Interaction to Integration to Interdependence: The process through which economies around the world have become increasingly interconnected as a result of increased trade and communications.
• Offshoring: Sending jobs to foreign countries at a lower cost.
• Outsourcing: Having another entity do work in your company.

Cost of Baskets

• Calculate CPI (Cost of Basket) for multiple years to identify inflation.
• Consumer Basket Surveyed each year to identify the weighted average of prices for a basket of goods and services

Labor Force

• Labor Force: Employed plus unemployed
• Unemployment Rate: Unemployed/Labor Force * 100
• Labor Force Participation Rate: Labor Force/Adult Population * 100

Unemployment

• Cyclical Unemployment: Fluctuations due to business cycles
• Frictional Unemployment: Time spent finding a job
• Structural Unemployment: Lack of available jobs matches the skills of a worker

Theory of Efficiency Wages

• Efficiency Wages: Firms pay above equilibrium wages to motivate workers and increase productivity
• Increased worker health: Higher wages enable better health care, resulting in fewer sick days and fewer illness-related absenteeism
• Reduced Turnover: Higher wages attract better workers and decrease the need to train new ones, resulting in less turnover
• Improved worker quality: Higher wages encourage a better quality of workers by attracting more talented people
• Increased Worker Effort: Higher wages encourage workers to work harder and more effectively

Stock

• Stock: A share of ownership in a company.

Initial Public Offering (IPO)

• Initial Public Offering (IPO): When a company first sells stock to the public
• Secondary Market: Existing stock is traded
• Broker: Acts as mediator to facilitate buying/selling stock

Stock Market

• Bull Market: Favorable economic conditions, stock prices rise.
• Bear Market: Unfavorable economic conditions, stock prices fall.

Production Factors

• Productivity: The average quantity of goods produced per worker or unit of labor input
• Y = Real GDP: Quantity of goods produced
• L = Labor: Quantity of labor

Catch-Up Effect

• Diminishing Returns: Doubling inputs will not double outputs as readily.

Investment from Abroad

• Foreign Direct Investment: Foreign company invests in a factory or enterprise.
• Foreign Portfolio Investment: Foreign company invests using money in bonds or stocks of a domestic company
• Free Trade: Promotes integration with the global economy.

Financial Institutions

• Bond Market: Bond is a loan from a saver to a borrower.
• Stock Market: Purchasing or selling shares
• Financial Intermediaries: Institutions to facilitate transactions by helping match savers and borrowers (ex: banks, mutual funds).

Different kinds of Savings

• Private Saving: Income not spent on consumption or taxes
• Public Saving: Tax revenue less government spending
• National Saving: Private + public saving = total savings. This will equal investment since savings=investment in a closed economy.

Budget Deficits and Surpluses

• Budget Surplus: Tax revenue is more than government spending.
• Budget Deficit: Government spending is more than tax revenue.

Loanable Funds Market

• Loanable Funds Market: Savings = investment to achieve equilibrium.

The Role of Interest Rate

• High interest rates: discourage borrowing and encourage saving.
• Low interest rates: encourage borrowing and discourage saving.

Present Value

• Present Value: The current worth of a future sum of money, or stream of cash flows, given a specific rate of return.

The Rule of 70

• Rule of 70: A mathematical rule of thumb used to estimate how many years it will take a variable to double if the variable is growing at a constant rate per year, where the growth rate is x

Insurance

• Adverse Selection: High-risk individuals are more likely to seek insurance
• Moral Hazard: Individuals with insurance are less motivated to avoid risk

Efficient Markets Hypothesis

• Efficient Markets Hypothesis: Stock prices reflect all available information and are therefore unpredictable.
• Random Walk: Stock prices move randomly

The Two Kinds of Money

• Commodity Money: Valuable item used as money (eg., gold coins).
• Fiat Money: Money not intrinsically valuable but has value because the government decrees it does (eg., US dollar).

Measures of the US Money Supply

• MI: Narrow measure: currency (physical bills/coins) + checkable accounts
• M2: Broader measure: M1 + savings accounts, money market mutual funds

Central Banks and Monetary Policy

• Central Bank: Oversees the banking system and regulates the money supply.
• Monetary Policy: Decisions concerning the money supply and interest rates.
• Federal Reserve (Fed): Central bank of the United States.

Reserve Requirements

• Reserve Requirements: The percentage of deposits banks must hold as reserves.
• Money Multiplier: The amount of money the banking system generates for each dollar of money deposited.

Tools that the Fed Uses to Control Money

• Open-Market Operations: Buying or selling government bonds to increase or decrease money supply, respectively.
• Reserve Requirements: Changing the fraction of deposits that banks are required to hold as reserves.
• Discount Rate: The interest rate the Fed charges banks for loans.

Factors that Shift Money Demand and Supply

• Factors that shift money demand: Prices, income, GDP.
• Factors that shift money supply: Prices, money, and GDP

Ample Reserve Economies

• Ample Reserve Framework: Abundant reserves in the economy, so changes in the reserve requirement ratio have minimal impact on the nominal interest rate.

This quiz explores the fundamental concepts of scarcity, opportunity cost, and trade-offs in economics. You will analyze how choices are made in a world of limited resources, along with the effects of incentives and unintended consequences. Perfect for students aiming to understand the basics of economic decision-making.