Introduction to Economics

Introduction to Economics

• Economics studies how limited resources are used to fulfill unlimited needs and wants
• Economics analyzes the production, distribution, and consumption of goods and services
• Individual purchasing decisions are a key focus of economics

Microeconomics and Macroeconomics

• Microeconomics delves into relationships within individual parts of the economy, like firms, industries, and consumers
• Macroeconomics examines the economy as a whole, focusing on aggregated behaviors of households and firms
• Key areas of macroeconomic study include: Growth, price levels (inflation), labor (unemployment), and the balance in the foreign sector (exports/imports, exchange rates)

Economics as a Social Science

• Economics is a social science that studies society and the relationships between people and organizations over time
• Other disciplines of social science is History, psychology, and political science
• Social sciences often deal with unknown variables, making definitive explanations difficult

Economic Development

• Growth is defined as an increase in national output within an economy over a period and is often measured quantitatively
• Development involves meeting economic goals like increased availability of basic necessities, raised living standards, and more social choice, measured qualitatively
• Sustainable development meets current needs without compromising future generations
• The World Bank defines sustainable development as "growth that lasts" without undue harm to the environment.

Positive and Normative Concepts

• Positive statements are based on facts that can be proved or disproved, without speculation
• Normative statements are based on norms, cannot be proved or disproved, and often include biases or value judgments
• Economic statements should be positive, simply stating facts

Why Study Economics?

• Studying economics can lead to greater financial security and knowledge
• Gross income is total income before deductions
• Net income is total income after deductions

Scarcity

• Goods are physical objects that satisfy human wants
• Services are actions one person performs for another
• People's unlimited wants and needs versus limited resources necessitates choices about resource consumption
• Scarcity refers to the limited supply of resources to meet unlimited wants
• Gas is an example of a scarce resource
• Shortages occur when producers won't or can't produce enough of a good/service and are temporary
• The scarcity of Tickle-me Elmo dolls is an example

Economics Defined

• Economics studies how people make choices given a limited supply of resources
• "People" includes households, businesses, and countries

Factors of Production

• Factors of production are the resources used to create all goods/services
• The factors include: land, labor, capital, and entrepreneurship
• Land refers to all natural resources used, such as property, oil, wood, and rubber
• Labor refers to the effort people devote to tasks for which they're paid
• Capital is any human-made resource used to produce goods/services and includes: Physical and human capital
• Physical capital consists of human-made objects used to create other goods or services, like factory buildings and machines
• Human capital is knowledge and skills gained through education and experience
• Entrepreneurs are people who use the factors of production to produce new goods and services, taking risks for profit

Opportunity Cost

• Trade-offs refer to all the possibilities given up whenever a choice/action is made
• Opportunity cost is the best alternative foregone as a result of a decision
• Choosing one thing means not choosing another, and the decision should offer the most benefit compared to the next best alternative
• Thinking at the margin involves deciding whether to use one more additional unit of a resource
• Example: Studying 2 extra hours and losing 2 hours of sleep may be better than 3 hours of studying and 3 hours of sleep
• Once the opportunity cost outweighs the benefits, no more units should be added

Production Possibilities Curves

• Production possibilities curves are graphs showing alternative ways to use an economy's resources
• Producing more of one thing means producing less of another
• Studying means less time to master destiny two
• The production possibilities curve helps show what the opportunity cost is of producing more of one good
• Plotting graphs: The line connecting all the plotted points indicates that the Production Possibilities Frontier is in use
• A point on the curve (line) shows the economy using ALL RESOURCES
• A point inside the curve indicates that the economy is performing inefficiently
• Any point inside the curve indicates underutilization
• A point outside the curve is not possible
• After a certain point, it costs more to increase production of a good
• Law of increasing costs says that as production switches from one item to another, more resources are needed to increase production of the second item
• Most suitable resources are used to produce an item, initially after production increases, less suitable resources are used

Circular Flow Model

• The circular flow model illustrates how businesses and households interact in a market economy
• Businesses buy factors of production to produce and sell products
• Households sell factors of production and buy products
• The resource market is where factors of production are bought and sold
• The product market is where goods and services are exchanged
• Outside flow involves the flow of money
• Inside flow involves the flow of physical items (factors of production and goods/services)

Capitalism

• Capitalism began as feudalism declined in Europe, starting in the 18th century
• New ideas of private ownership were developed
• Political revolutions sweeping Europe shifted ideas about rights and individuals
• Development expanded with the emerging English textile industry in the 16th-18th centuries
• Adam Smith's (1776) "Inquiry into the Nature and Causes of The Wealth of Nations" advocated for self-regulating economic forces
• Laissez-faire suggests the government should minimize intervention

Features of Capitalism

• Private ownership: Individuals and businesses control the factors of production, rather than the government, with the resources needed for a country's economy
• Market economy: Individuals and businesses can freely sell goods, services, and labor
• Individuals own their labor products, which are offered on the market
• Goods and services are exchanged freely, and consumers can choose among the goods offered
• Consumer demand affects what and how things are produced based on the law of supply and demand
• Individuals and businesses can freely compete to earn profit in an open market
• Businesses compete to provide goods/services and resources, where individuals compete for wages and jobs
• Profit and competition encourages owners to increase efficiency and produce the correct amounts

Advantages & Disadvantages of Capitalism

• Advantages: Freedom to make decisions, limited government involvement, and the freedom to spend money as desired
• Disadvantages: Social classes can lead to wealth inequality, with little consideration to those at a disadvantage

Socialism

• Socialism emerged in Western Europe during the late 1700s/early 1800s following the Industrial Revolution, in which economies shifted from agricultural to industrial
• The industrial revolution subjected workers to harsh conditions and worsened the inequalities
• Thinkers advocated for political reform to address these economic and social inequalities
• Governments control many means of production and directly provide for many of people’s needs
• Country can be/may not be democratic
• Democratic socialism sees the government still owning the factors of production and making the economic decisions

Goals of Socialism

• Equal distribution of wealth
• Government control of distribution
• Government control of public ownership of production

Advantages and Disadvantages of Socialism

• Advantages: It promotes equality and protects people's rights
• Disadvantages: Creates big government, leading to potential dictatorship/oligarchy where one may not express themselves individually

Communism

• Communism evolved from socialism with radical ideas
• Karl Marx wrote against capitalism and its classes in "The Communist Manifesto" (1848)
• Revolution of the proletariat - urged the working class to overthrow the bourgeoisie (the people with the means of production (the rich)

Features of Communism

• Referred to as extreme socialism as it eliminates basic freedoms
• Government controls everything, including production and distribution
• A governing body decides occupations and eliminates people's freedom to influence government's decisions
• Communism, according to Marx, has never been practiced

Advantages & Disadvantages of Communism

• Advantages: Everyone stands as an equal with the same amount of access to resources, while always having a job
• Disadvantages: Same as socialism when it limits creativity and initiative
• There is no incentive to work hard and be productive
• Freedom is limited as one cannot choose their own occupation or vote

Demand

• Demand shows the desire to own something alongside the willingness to pay for it
• It is measured by the quantity of goods purchased
• Demand is not measured quantity of money spent
• The Law of Demand states: When the price of a good decreases, consumers buy more
• When the price increases, consumers buy less

Demand Curves

• Because the quantity demanded of a good decreases as the price increases, the demand curve is downward sloping
• The curve represents all quantities demanded at all prices at a given point in time
• A Demand Schedule shows the table with the data for demand where quantity demanded is on the x axis and the price is on the y axis

Change in Quantity Demanded

• Any change in price results in only a change in the quantity demanded
• This produces a movement along the demand curve However, if conditions in the market change, the demand curve is no longer accurate
• When a government gives every adult a $1000 stimulus check, it causes the demand curve to no longer be accurate
• When one moves down the demand curve, the price lowers and the quantity demanded increases