Economics 1.

1 Scarcity and the factors of production

Scarcity -> make decisions by looking at importance
Need: Something essential for survival
Want: Something that we desire
Satisfication of wants/need -> goods/services
Goods: The physical objects that someone produces
Services: The actions or activities that one person performs for another.
As needs + wants = infin. -> ! as goods and services are limited = scarcity
Therefore scarity: the principle that limited amounts of goods and services are
avialabe to meet unlimited wants.
THFR Economics: the study of how people seek to satisfy their needs and wants by
making choices.
Shortage: A sit. where consum. want ++good/service than prod. are ! willing to
make more available at a particular price.
Scarcity != Shortage
- Shortage = last finite time
- Scarcity = Always present
Entrepreneur: person who decides how to combine scarce resources -> products
FACTORS OF PRODUCTION The resources used to make all goods and services
Land All natural resources used to produce goods and services.
Labor The effort ppl. use to tsks fr pay.
Capital Any man mad. rsrce = used to produce other goods and services
2 typ. Physical capital and human capital
Physical capital man mad. OBJ. -> goods and services
Human capital knwldge + skllz a wrkr ++ drng education
Economy req. physical + hmn capital -> goods + services.
Capital = key prod. factor as it great deal of time and money
Spec. of benfts:
1. ++ Time
2. ++ knwldge
3. ++prdctvty
FNL THT All gds + srvcs are scarce as resources usd r scrce.
Sec. 1.2 Opportunity Cost
Trade off: The act of givng ^ 1 bnft. for a > bnft.
Every stge of life = Mkng trade offs
Dec. busnesss mak. abot usng rscs = hvng trade offs
Guns or Butter Phrse shwng tht contres w/ ++ prd. of millitairy gds have - - prd.
cvl gds (bcse rsrcs)
Opportunity Cost: The most desirable alt. gvn ^ as a rslt of 1 dcsn.
To fnd ++ opp cost = unclr.
Thrfre -> usng a dcsn. grd = useful
Thnking at the margin: The process of deciding whether to do or use one add. unit
of some resource.
Cct/bnft analyss: A dec. mkng prcss where you >< sacrifice vs. gain
Usfl -> hlps ppl. analyse/take the best dcsn (fr thr nds) by shwng thm the ++bnft
vs. ++cst.
Marginal costs: The xtra cst of ++unit
Marginal benefit: The xtra bnft of ++unit.

Sec. 1.3 Production Possibilities Curves

Graph -> analysis of choices vs. trade offs
Ex: prod. poss. curve: A grph tht shws alt. ways -> use ecnmys prod. resources.
2 pos. for axiss -> 1 cat. gds/srvcs 2- pairs of spcfc goods/srvcs
drwng PPCs:
1. decide whch gds/srvcs to examine
2. cin>> 1 item on each axis
3.lk at rsrcs to det. whch gds/srvcs a cntry can prod.
4. plot the amt. possible for each when a certn. amt of rsrcs is used for one
gd/srvc/cat.
prod. pos. frontier: A line on a PPC tht shws the max. pos. outpt. 1 ecnmy cn prdce.
PPC nt e/a pt. on PPF reflects a tradeoff. (bcse rcsrs = scrce)
Use of PPCs:(Shw effcy o/ ecnmy),(! ecnmys grwth),(opp. cost of prd. ++ 1gd/srvc)
PPF -> ecnmy being the most efficient
Efficiency : use of rsrcs to max. output of gds/srvcs
Underutilization: the use of fwr rsrcs thn ecnmy is cpble of usng
Lmt of PPC = it is for 1 pt. in time ( (rsrcs = changing) -> no stble amount of rsrcs
PPC mdls grwth/decay w/ FPPF = -> right n spaces on graph
decay = <- , left n space on graph
CST != $$$$ ( CST = Opp. CST)
Law of increasing csts = an ecnmc principle which states that as production shfts
from one good to another, ++++ needed to ^ prod. of 2 nd gd/srvc. (this is bcse
some rsrcs = ++ util. in some gds over othrs
THRFR: LIC -> A crve on PPC
Tech. = VITAL FACTOR IN ECONOMIC GRWTH
Tech: the process used to create the gds/srvcs
THRFR TECH must be assessed when crting PPC
TECH = 1 fctr that can ++ effcy
THRFR gov. invst in new tech
THRFR gov. invst in educ -> get trained ppl using the new tech (as hghly sklld wrkrs
++ effcy, ecnc grwth
Sec. 2.2 The Free Market
MRKT: Any arrgmnt tht lts byrs + sllrs excng stff.
- Elmnt nd fr indiv. tb self suff.
- Allw exhng of invntry for wht we wnt.
SPCLZTION Conc. of prod. effrts of indiv. + bussnss fr a lim. # of act.
Eff. use of captl, lnd, + lbr.
- Bnfts businesses by fcsng on a lmtd # of rel. prdcts + srvcs -> Eff. in capital
and lbr mngement.
- If !SPCLZTION, -> mrkts != necessary
FREE MARKET: 3 ecnmc qs slvd by voluntary exchange in markets
RPT: EVRYTHNG IS PLNNED W/ VOLUNTARY EXCHNGE!!!
- participants -> households and firms
- HSHLDS: prsn/grp lvng -> sngle rsdnce
- bsnss/FRM: Org. queuss rsrcs to prod a prod/srvc, whch sells

- FRMS = i/o of raw mat. -> prcssd mat.

RPRSNTTN o exhngs in a free market =circ. flow model
Factor Market -> The arena of exchange in which firms produce fact. of prod from
households.
Product Market -> The a.. o ex where households purchase goods and services
form firms
Adam Smith - Market self regulates due to competition and our own self-interest.
- in each economic exchange, each party acts only in self-interest -> motivating
force in the economy
Incentives drive people to work in logical ways
COMPTTN: the strggl amng pdcrs for cnsmrs $$$.
INVS HND -> term coined by Adam Smith to dsc. the self-regulation of the ecnmy
FREE MRKT ADVNTGS:
- ECNMC EFF., as the self reg. allows an efficient response to rapidly changing
conditions.
- ECNMC FRDM, as they are the free market w/ no government control
- ECNMC growth, as the competition encourages rapid growth
- Other goals: Consumer Soveriegnty.
WKNSSS: lttl -> no ecnmc equity / sec. , no cntry op. under such a system.
Section 2.3: Centrally Planned Economies
Centrally Planned ECNMYS: A sys. whr the gov. makes all dec. about the 3 ky
ecnmcs qs
- CNTRL Bureaucracy dcds the answrs the3kqs
- Gov. ownsall rsrcs( dir + indir )
- Also called cmmnd ecnmy
- No cnsmr sov.
- Has commitees that control various sectors of production and consumption.
Socialism: A rnge of political and ecnmc sys. bsd on the blf tht wlth should be spred
evenly thrght scty.
MRKT SCLSM: Gov. uss txs to redis. wlth + prov. ext. srvcs
CMMUNISM: A pol. sys. in whch the gov. own all rsrcs, mns of prod, and answrs
3kyqs.
- Derived by Karl marx, who bel. tht labor ws the mst imprtnt rscrs in ecnmy
- ALWYS has bn AUTHORITARIAN GOV: a frm of gov. tht lmts frdms + req. strct
obed. from ctzns
EX of Communism:
The Soviet Union:
- (1917) rev. tppld rssn gov. -> (1928) Svt ldr Joseph Stalin imposing the first in a
series of 5-yr plns to boost agriculture. -> command ecnmy -> (1991) When in
broke up
- S.Ecnmc.Plnnrs wnted power and prstge -> allctd rsrcs for industry and army ->
lss cnsmr gds fr the actl ppl.
- als, Agriculture nvr blncd -> whle the cntry ws a srs exporter of wheat, ddnt hv
engh to fd ppl.
- ALL LED TO THE END OF THE SU
China:
- 1949 1970/80s -> gov. plnrs cont. the entr chnse ecnmy.

BFR, the gov. allwd sm farmland to remain prvte in order to make factorys,
which ended up being very costly to mk and low qual.
- 1950s, gov. frcd mny psnts -> farming commns.-> it esng rest. ovr dcsns md by
wrkrs -> nw ecnmc pol. in 1970s let frmrs the chncs to do more and gave
bonuses for better qual. products by manufactures -> the ecnmy today.
- GOV wns firms in mjr industries and gov plnrs control mny key ecnmc dec., but
that was it.
DSADVNTGS of CPEs:
- Ecnmc effcy, as 1 pty controls it all. Leading to lss incntvs fr wrkrs,
expnsvnss.exe, +lks flex. to adpt
- ECNMC frdm, as cmd ecnms tnd to scrfce indiv frdm fr gl. Als, dis. competition
and keeps chcs out of cnsmrs
- ECNMC GRWTH -> the ecnmy dscourags change, which discourages
entrepreneurship.
- ECNMC equity -> gov. offcls + fvrd crrs enjy greatr accss to and actually good in
quality products.
- Other goals: guarantee jobs and incme + jumpstartable industris
Section 2.4 -> Mixed Ecnmys
laissez faire == the invsble hnd of gvrnment
blf in LF -> ^ in gov. invlvmnt = grt thng
Gov. prvde bsc rights + prtctng prprty rights
MIXED ECNMNY: A mrkt based sys. that the gov. is invlvd in, to some extent. -> a
blnc of nds vs. frdm is a high priority for sch a sys.
- Gov. can purchase/ del. stff in the factr mrkt and the gd mrkt.
- tx -> trnsfr $$$ to bsnsss and indiv for a var. of rsns, which inclds, for the US,
social security.
- exsts a continuum of mixed ecnmns
ECNMC trans. : a per. of chnge in which a nat. mvs from one ecnmc sys. to another.
Privitization -> prcss of slling bsnss/srvcs operad by gov. to invstors to cmpt in the
mrkt
USA Ecnmy (USA!!! USA!!! USA!!! USA!!! USA!!! USA!!! USA!!! USA!!! USA!!! USA!!!)
- hv a free enterprise sys.: A sys. char by prvt/crprt ownership of cptl gds
- Enjy a grt deal of ecnmc freedom
ECNMC NTS CH.3:
FREE Enterprise: the social and political commitment to giving ppl. the freedom and
flexibility to try out their business ideas and compt. in the market place.
Profit Motive: Drive of indiv. to mak. dec. to improve material well being.
- Forces business owners, and entrepeneurs to take rational risks, invite
innovation, and increase efficiency
OPEN OPP: Princ. that anyone can compete in the market place
Legal Equity: Prin. that everyone has the same legal rights -> hlps the ecnmy by
max. a countrys use of human capital
Private Prop Rights: Allow ppl . to control their poss. + use them as they wish
Free Contract Allws ppl. to dec. what agreements they want to enter into.
Voluntary Exchange Alls. ppl to decide what when and how they want to
exchange
- Encourages comp.
Interest Group A priv. org. that tries to persuade pub. off. to benefit member of it.
All of this freedom -> patriotism
eminent domain -> right of a gov. to take priv. prop .for pub. use

Article 1 -> Gives Congree the power to levy taxes

16th amm. -> Taxation based on income
Contracts -> Legally binding agreements between ppl. / businesses
- Protected by Art. 1, Sec. 10
Educated cons. mak the free enterprise sys. work w/ ++ eff.
Public Disclosure laws -> Require companies to gv. cons. imp. info about their
products
Federal Trade Commiddion Act: Adverts cannot deceive
Truth in Lending Act: req. businesses offer. loans to discls cert. info to cons.
before they sign an agreement
Negative Eff: Costly to implement rules,Stiflng of compttn, increase of prises to
compensate.
Sec 2: Promoting Growth and Stability
Macro vs. Micro ECNMCS: Macrp deals w/ entr ecnmy, whl micro deals with
individual households and firms.
Gross Dom. Prod. : tot. value of all of all fin. gds + srvcs prod in a country in a given
year.
Business Cycle: Period of expansion and contraction of the ecnmy
chngs in Bus. Cyc. -> growth and decline ( ppl. in wshngtn try to get right )
ecnmc pol. hv 3 main goals: High Employment ( 94-96%), Ecnmc Grwth (American
Dream), Ecnmc Stab. (-> ecnmc grwth, less price fluc. , sec. of fnnce instit. ,
regulated by federal gov. monitors, bank regulators, and other finan. regltions. )
Referendum prop. laws sub. dir. -> pub. -> voters playing a large role in the gov.
Grwth increases by new tech and processes, but it leads to obsolescence ( when
older prod. and processes bcme out of date.
Thrfr, the gov. promotes innovation and invention.
ex: Morrill Acts of 1862 and 1890 created land g rant coll. that received federal
land and money to pursue the study of agriculture and the mech. arts
Also, it create financial institutions prod. new tech ( Ex. NASA )
Patent: a gov. liscence that giv. the invent. of a new prod. the right to prod and sell
it.
Copyright: Gov. Lscence, w/ grants an author exclusive rights to pub. and sell
creative works.
Work Ethic. A commitment to the value of work
Sec. 3 providing Public gds.
PUBLIC GDS: A shrd gd/srvc for w/ it would be ineff./ imprac. to make consumers
pay indiv. + to exclude those who did not pay.
- Taxes pay for pub. gds.
- available to everyone
- Any no. of cons. can use them w/o red. the benefits to any sing. consumer
- Financed by the public sector
PUBLIC SECTOR The part of the economy that involve. the trans of the gov.
PRVTE sec. The part of the ecnmy tht invlv. trans. of the indiv. and businesses,
who would have little to no incentives to prod. pub. gd.
F/e pol., the gov looks at the ben. + costs ( like infrastructure ) , which is regarded
as a way to boost the ecnmy, which has one drawback a limiting of ecnmc
freedom.
2 ben. criterea:
1. The ben. to e/a indiv. is < the cst tht e/a wld hv to appy if it wr prov. privately
2. The tot. benenfits to society are > total cost.

FREE RIDER PROB: Is someone who did not pay for a pub. good, yet they get the
gd./srvc.
- sugg. what wud hppn if the gov. stpped collecting taxes for public gds.
Market failure a sit. in w/ the free market does not dis. rsrcs evenly
EXTERNALITY: an ecnmc side effect of a gd./ srvc tht gen. gd/ srvc tht gen. ben. /
csts to someone other than the person dec. how much to prod/consume = a type of
market failure
+ + Externalities good side effects of the public goods. w/ allw ppl who did not
purchase the good to have ben. (opp. - - ben. )
Deb. between Gov. driven or Market driven sol.
Sec. 4 Prov. a safety net
Poverty threshold An income below what is needed to supp. families/households
The Gov. role -> prov. a safety net for ppl. who are in those groups (aim to ++
stndrd of lvng )
Welfare -> a general term for gov. aid of poor.
- Began under FDR. w/ LJs War against pov.
Examples of policies:
CASH TRANSFERS: Dir. payments of $$ by the gov. to poor, diabled, or retired ppl.
Examples: TANF money given to state welfare programs, Social Security payroll
taxes redis. to the elderly, Unemployment insurance, w/ is paid by employer taxes (
recip. must offer proof of trying to get work ) , Worker compensation insurance
prog. for workers injured and disabled on job.
IN-KND BEN. GDS/SRVCS provided w/o$$/<$$, like food stamps, subsidized
housing, and legal aid. (6th amendment guaranteed)
Medical Benefits + Public Education
Also, ppl. encourage private action to help those in need. $$ prov. by GRANTS
PURE ELASTICITY of DEMAND = % ^ QD / %^P
%^ = (new-old)/old
* 100
SHIFT = POP^-> DEMAND ^
total revenue: the amt of $$ tht a cmpny rcvs for all products