Introduction to Economics

Economics the study of how individuals and societies make decisions about ways to use scarce resources to fulfill wants and needs. Economic Questions Society (we) must figure out, WHAT to produce (make) HOW MUCH to produce (quantity) HOW to produce it (manufacture) FOR WHOM to Produce (who gets what) WHO gets to make these decisions?

Resources - The things used to make other goods. Scarcity (The problem): unlimited wants and needs but limited resources Because ALL resources, goods, and services are limited we must make choices! Microeconomics Behaviors of individual economic units like consumers, producers, landowners, families, etc. How and why do they make the decisions they make? Macroeconomics Analyzes how the entire national economy performs. It analyzes unemployment, inflation, price levels, interest rates (many things we take as given in microeconomics).

Industrial Economics Industrial Economics is the study of firms, industries markets and their relationship with society When analyzing decision making at the levels of the individual firm and industry, Industrial Economics helps us understand such issues as, the levels at which capacity, output and prices are set; the extent that products are differentiated from each other; how much firms invest in research and development (R&D) how and why firms advertise

Opportunity Cost = the Value of the Next Best Choice

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Four Factors of Production 1. LAND Natural Resources Water, natural gas, oil, trees (all the stuff we find on, in, and under the land) 2. LABOR Physical and Intellectual Labor is manpower 3. CAPITAL - Tools, Machinery, Factories The things we use to make things Human capital is brainpower, ideas, innovation 4. ENTREPRENEURSHIP Investment $$$ Investing time, natural resources, labor and capital are all risks associated with production THREE parts to the Production Process 1. Factors of Production what we need to make goods and services 2. Producer company that makes goods and/or delivers services 3. Consumer people who buy goods and services Production Process

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Capital Goods and Consumer Goods Capital Goods: are used to make other goods Consumer Goods: final products that are purchased directly by the consumer

Changes in production Division of Labor different people perform different jobs to achieve greater efficiency (assembly line). Consumption how much we buy (Consumer Sovereignty)

Conditions that make economic models valid Ceteris paribus assumption (Ceteris paribus means all else held constant. If you do not hold all other factors constant then you cannot determine what affected the change.) Association vs. causation - The fact that one event follows another does not necessarily mean that the first event caused the second event What makes economic predictions to be contradictory and corrective actions to be ineffective? Economic issues are controversial (complex and several indicator) Time delay information lag, policy determination, policy effectiveness lag Positive economics Ifthen economists may disagree about the occurrence of the first event Normative economics predictions based on values, preconceptions

Comparative Economics
Command Economies Def: Economic questions answered by the government Very little economic choice No private ownership Communism Old Soviet Union, old Communist China, Cuba and North Korea

Communism Government should control economy and distribute goods and services to the people Karl Marx - Founder of revolutionary socialism and communism

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Free Market (Capitalist) Economies Economic questions answered by producers and consumers Limited government involvement Private property rights Wide variety of choices and products

Adam Smith - Explained the workings of the free market within capitalist economies Government stays out of business practices hands off to let the market place determine production, consumption and distribution. Individual freedom and choice emphasized. Principles of Capitalism Competition more businesses means lower prices and higher quality products for consumers to buy. Voluntary Exchange businesses and consumers MUST be free to buy or sell what and when they want. Private Property Individuals and businesses MUST be able to get the benefits of owning their OWN property. Government does not control it. Consumer Sovereignty consumers get to make free choices about what to buy and this helps drive production (Demand drives Supply). Profit Motive people want to make or save $$$$. Their Self Interest motivates Capitalism Social Safety Net Mixed Economy idea that says the government should NOT allow people to suffer in economic crisis (natural part of Capitalisms Business Cycle), but provide security instead Social Security, Unemployment Insurance, etc.

Mixed Economy/Socialism Government involvement and ownership and control of property, of decision making, and companies. Government control of business Social safety net for people Socialism Common in Europe, Latin America, and Africa

John Maynard Keynes - Government should intervene in economic emergencies through tax and spending (Fiscal Policy) and changing the money supply (Monetary Policy). This is done to smooth out the business cycle (expansion and recession) and keep inflation low.

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When Production Decreases Downsizing Lying off employees to save costs. Outsourcing sending jobs and manufacturing overseas or contracting to outside companies to save money. Bankruptcy government allows business to restructure its debt, but now all profits go to paying off debt rather than to the owners/investors. Out of Business lose all your business, money, and profits.

How does Labor protect itself? Labor Unions: organization of workers who have banded together to achieve common goals Wage protection Workplace safety Benefits Job protection

Collective Bargaining - Representatives of the Union and the company negotiate a contract for the workers; usually they rely on compromise Strikes - When an agreement cannot be reached, workers stop working to try to force the hand of the company

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