Lesson 1--fop-and-types-of-econ[1]

The Economic Way of Thinking

Academic Decathlon Lesson 1Berryhill Economics

Economics

“The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.”

--John Maynard Keynes

Economics—What is it?

Social science—why? Because it deals with people and their choices.

Definition:Economics is the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources.

Economics—What is it?

A simpler definition:Economics is the study of allocating scarce resources to meet alternative ends.

An even simpler definition:Economics is the study of making necessary choices.

The Fundamental Economic Problem

The fundamental economic problem facing all societies is that of scarcity.

Definition:Scarcity is the condition that results from society not having enough resources to produce all the things people would like to have.

The Economic Problem

Scarcity exists because human wants are unlimited and resources are finite (limited)

Finite resources restrict the ability to produce.

What are resources?

Factors of Production

Resources are things we need to make other products. They are our FACTORS OF PRODUCTION.

Definition:Production—process of creating goods and services—takes place when all needed factors of production are available.

Factors of Production

Factors of Production are land, labor, capital and entrepreneurship

Definition:Land refers to “gifts of nature,” or natural resources not created by humans. This includes land, forests, mineral deposits, livestock, sunshine, climate, etc.

Factors of Production

Definition:Labor is people, their time, skill, efforts, and abilities used to produce a good or service. An example is people’s ability to work.

Factors of Production

Definition:Capital is the tools, equipment, machinery, and factories used in the production of goods and services. This includes any equipment used to make something else like a bulldozer, a computer, and even money (known as financial capital).

Factors of Production Definition:Entrepreneurship is the special human

resource, distinct from labor, that gives growth and forward movement of production in a society. Entrepreneurs take the initiative to produce a good or service, they make basic business-policy decisions, they are innovators that commercialize and develop new products, and they are risk takers that use their time and money to produce things with no guarantee of profit.

Factors of Production

These factors of production must be present for production to begin.

Definition:Production is the process of creating goods and services and production will take place only when all needed factors of production are available.

Three Basic Questions

Because we live in a world of relatively scarce resources, we have to make wise economic choices. Each society must answer these three basic questions to make decisions about the ways our limited resources will be used.

Three Basic Questions

WHAT to produce?--military equipment or other items such as food, clothing, or housing?

HOW to produce?--mass production methods that require a lot of equipment and few people or should they use less equipment and more workers?

Three Basic Questions

FOR WHOM to produce?--once the society knows what and how it is producing, these goods and services must be allocated to someone. How do they decide who gets what?

Different Societies

Different societies will choose to answer these economic questions differently.

How a society chooses to answer the questions will determine what type of economy we label that country as having.

Traditional Economies

In traditional economies, the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom.

Usually, habit and custom also dictate most social behavior, and individuals are not free to make decisions on what they want or would like to have.

Traditional Economies

Can anyone think of any traditional economies that exist today?

Are there any instances of traditional economies in our society today?

Traditional Economies

Advantages--Everyone knows their role—WHAT questions answered for them--Everyone knows HOW to produce (same as their parents did before them)--FOR WHOM questions answered by customs and traiditions

Traditional Economies

Disadvantages:--Discourages new ideas (and therefore new economic growth)--Lack of progress leads to lower standard of living

Command Economies A command economy (may also be

referred to as a PLANNED economy) is one in which a central authority makes most of the WHAT , HOW, and FOR WHOM decisions.

Economic decisions are made by the government: the people have little, if any, influence over how the basic economic questions are answered.

Command Economies

Can anyone think of some examples of command economies that exist today or have existed in history?

Are there any instances where our society has command economy traits?

Command Economies

Advantages:--Can change direction in a relatively short period of time--There is little uncertainty about one’s role in the society--Government provides social reforms/programs for little to no cost to the public

Command Economies

Disadvantages:--Not designed to meet the wants of consumers--System does not give people incentive to work hard--Large decision-making bureaucracy--No flexibility--Little to no rewards for individual incentives

Market Economies

In a market economy people and firms act in their own best interest to answer the WHAT, HOW, and FOR WHOM questions.

A market is any mechanism that allows buyers and sellers to find each other and trade their goods and services.

People’s decisions influence the WHAT, HOW, and FOR WHOM.

Market Economies

Can anyone think of any examples of market economy today or in history?

Any examples of a market economy in our own society?

Market Economies

Advantages:--Can adjust to change over time--High degree of individual freedom--Relatively small degree of government interference--Decision making is decentralized (not given to the central government)--Variety of goods and services available to consumers--High degree of customer satisfaction and standard of living

Market Economies

Disadvantages:--Doesn’t provide basic needs for everyone in the society (poor, elderly, sick)--Doesn’t provide public services (system of justice, national defense, health care)--High degree of uncertainty--Must be reasonably competitive, resources must be reasonably free to move from one activity to another, and consumers need access to adequate info to make wise decisions or economy can fail very easily

Mixed Economy

An economy in which there are some elements of a traditional economy, some elements of a command economy, and some elements of a market economy

What the U.S. is said to have