unit 1 academic basic economics
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Basic Economics - Academic
Unit One
I. What is Economics?
A. Study of Choice
1. All decisions involve choices
2. Resources are finite or limited.
3. Human needs and wants are unlimited.
4. Needs – necessities (water, food)
5. Wants – luxuries, things not needed.
6. Scarce – when there is a limited amount of an item.
7. Shortage – a sudden shortfall of a product.
B. Decisions
1. Trade offs – always two or more options in our choices.
2. Costs – What is given up when making a decision.
C. National
1. Guns and Butter
2. Guns = Military spending
3. Butter = Domestic Spendinga. Social Security
b. Medicare
c. Medicaid
d. Social Security
4. Presidential Decisions a. FDR
i. Great Depression
ii. WWII
b. LBJi. Great Society
ii. Vietnam
c. GWBi. No Child Left Behind
ii. Tax Cuts
iii. War on Terror
5. Production Possibilities Curve
a. A graph that shows alternative ways to use an economy’s resources.
b. Efficiency – Using resources to maximize production of goods and services.
c. Underutilization – Using fewer resources than an economy is capable of using.
d. Examples: i. Cost – To an economist, countries give up on ideas,
products. ii. Law of Increasing Costs –Cost of producing the
second item increases.
D. Individuals
1. Entrepreneurs use the Factors of Production a. Land
b. Labor
c. Capitali. Physical Capital - All human-made goods
ii. Human Capital –The skills and knowledge gained by a worker through education and experience.
2. Thinking at the Margin – taking into consideration the consumption of one more unit.
II. Different Economies
A. Answering the Three Economic Questions
• What goods and services should be produced?
• How should goods and services be produced?
• Who consumes goods and services?• Who and how these questions are
decided is one of the most significant questions in economics.
B. Economic Goals and Societal Values
1. Economic Efficiency- Societies attempt to produce most out of their resources.
2. Economic Freedom- Unlimited choices. 3. Patriotism- The love of one’s country4. Many feel the USA should ensure
economic freedom. 5. Instead of economic or political
freedoms, China favors freedom from poverty instead.
C. Economics and Values
1. Traditional Economy –relies on habit, custom, or ritual,
a. Slow to change, but evolve into other economies.
b. These rely on bartering, are inefficient.
2. Market Economy –production and consumption are based on exchanges people make.
3. Command Economy – central authority is in control (Moscow in Soviet Union).
D. Adam Smith Wealth of Nations
1. Thought self-incentives like profit motivated people.
2. Companies work to provide best product and lowest price to beat competitors.
3. Marketplace automatically fixes itself – principle known as invisible hand.
4. Government should stay out of economy – policy known as laissez faire.
E. Marx & The Communist Manifesto
1. Marx & Engels (his co-author) had the following ideas about people & their delusions: They…
a. are greedyb. Want things like TV, cars, big houses (materialism).c. Were power hungry (rich controlled poor).d. Used religion, alcohol, drugs -to relieve themselves of reality.
2. Society was to evolve –a. Workers (proletariat) were to revolt against the rich
(bourgeois) & take over government, means of production.b. Socialist society evolves - people distribute wealth evenly & no
more oppression.c. Eventually people would not be greedy and no longer need
government, live in harmony, in a communist state.d. PROBLEM - Dictators can take over easily & create an
authoritarian regime.
F. John Maynard Keynes
1. The General Theory of Employment, Interest, and Money
2. Reduction in interest rates
3. Government should invest in economy, especially in infrastructure.
4. Saving instead of spending will encourage recession or depressions.
F. Modern Economics and Mixed Economies
1. Countries slide on economic continuum that ranges from command to free.
2. China is now involved in a transition period to move toward privatization (free).
3. Most nations strive to become as free as possible and let decisions be made in the private sector.
4. The USA is also privatizing (more businesses, less regulations.)
G. Modern China1. 1,321,851,888, GDP:$7.043 trillion2. Premier WEN Jiabao, Beijing 3. 1978 leadership moved economy-centrally planned economy to more market-oriented
system.4. Strict Communist control5. Influence of non-state organizations and individual citizens has been steadily
increasing. 6. Household and village responsibility in agriculture in place of collectivization7. Increased the authority of local officials and plant managers in industry8. Wide variety of small-scale enterprises 9. Opened the economy to increased foreign trade and investment. 10. Quadrupling of GDP since 1978. 11. China in 2003 stood as the second-largest economy in the world after the US12. Per capita terms the country is still poor. 13. Worst results of
a. Socialism (bureaucracy and lassitude) b. Capitalism (growing income disparities and rising unemployment).
14. Government has struggled to a. Sustain adequate jobs growth for tens of millions of workers laid off from state-owned
enterprisesb. New entrants to the work force; c. Reduce corruption and other economic crimesd. Keep afloat the large state-owned enterprises -shielded from competition by subsidies
15. From 80 to 120 million surplus rural workers are adrift 16. Lose arable land because of erosion and economic development.
H. North Korea1. 23,301,725 population, GDP $40 billion2. KIM Jong Il 3. Pyongyang 4. One of the world's most centrally planned and isolated economies5. Underinvestment 6. Spare parts shortages. 7. Nation has suffered years of food shortages because of a lack of
arable land, collective farming, weather-related problems, and chronic shortages of fertilizer and fuel.
8. Large-scale military spending eats up resources needed for investment and civilian consumption.
9. Black market prices continued to rise following the increase in official prices and wages in the summer of 2002
10.Relaxed restrictions on farmers' market activities in spring 2003, leading to an expansion of market activity.
III. American Economy
A. Free Enterprise, Yesterday and Today
1. America’s birth was marked by wishes for new freedoms and less taxes.2. Most politicians believed in laissez faire.3. Government needed little revenue and gained it through tariffs, land sales,
etc.4. Few government programs. 5. Unregulated industry led to massive growth, but heavy negative externalities.
a. Pollutionb. Slumsc. Deep cutting depressions.d. Bank closingse. Economic panics.
6. Great Depression – FDR takes on Keynesian Economics.7. Ronald Reagan – Decides taxes are too high and there is too many
regulations that stifles business.8. Supply side economics – Taxes need to be at a moderate amount. 9. Deregulation begins.10. Laffer Curve – demonstrates that when taxes are too high or low,
governamne will bring in little revenue.
8. When the government should get involved…
a. Over time problems have to be met by solutions from the gov’t. Follows these steps:
i. Market failure: something the private sector cannot do.ii. Public interest –people are concerned and want gov’t to
intervene if the economy cannot provide. iii. Public policy –Government responds to public interests with
laws. iv. Interest groups lobby politicians, or give them ideas. v. Examples:
a) Healthcare – unfulfilled.b) Transportation – to big for companies.c) Water and sewage – to big and important for a company.
b. Must restrain negative externalities such as : Coal burning power plants = exhaust that may harm breathing – Government responds with pollution laws.
B. Providing Public Goods1. Cost of public goods is spread more
evenly.
2. The cost would be higher if it were provided privately.
3. These generally benefit society as a whole.
C. Tracking Our Successful Economy
1. Macroeconomics/Microeconomics = Big/Small
2. Gross Domestic Product – Income of a whole nation.
3. Business Cycle – Expansion and contraction.
4. Technology –Anything used to help produce (biggest advantage for USA) has.