Fundamental Concepts

The fundamental problem that all societies face is called ______.

This means it isn’t possible for everyone to have everything he/she wants. Why?

Because Resources are ______. But Wants are ______.

Economics: is the study of how people and nation’s try to satisfy their unlimited wants through the careful use of limited resources.

Economics is sometimes called, “______”. Why?

To satisfy as many needs and wants as possible we must use our scarce resources as ______as possible.

Society’s needs and wants are satisfied by combining various resources into finished ______and ______. Examples include food, clothing, shelter and transportation.

TINSTAAFL— Stands for, there is no such thing as a free lunch.

Everything we do has a cost even when it seems to be free. The true cost of producing one good or service are the other things we could have had instead.

Society must make ______about how to use its scarce resources.

Every society, no matter how rich or poor must answer 3 basic questions.

They are; 1. ______to produce 2. ______to produce . 3. ______to produce.

Resources: can also be called ______or ______. They are the building blocks necessary to make the goods and services which in turn satisfy needs and wants. These resources can be classified in 4 ways.

1.Land: also called ______or ______which occur naturally without human effort.

Examples include fertile soil, sunshine, wind and animals.

1. Labor: includes all people with their ______, ______and ______brought to the workplace.

Examples include teachers, construction workers, policemen, factory workers and nurses.

2. Capital: represents the ______, ______, ______and factories used to produce other goods and services.

This is not the same thing as financial capital or money.

Capital goods are critical to our nation’s ability to produce more. This is called ______. Examples of capital include hand tools, commercial ovens, cranes, fork lifts and computers.

3. Entrepreneurship: this is the ______in search of profits. These are people who start new businesses or come up with new ways of doing things. examples include

______

______.

Gross Domestic Product: is the ______value of all ______goods and services ______within a nation’s ______in 1 year. (Think of GDP as a big pie.)

GDP is the best measure of how much our economy can produce. As GDP continues to grow, it affects our standard of living.

Standard of living: is the ______one has based on the possession of necessities and luxuries that make life easier.

How big a slice of pie will you get? What will determine the size of your slice?

Economic Growth: when a nation’s total output of goods and services ______over time. This means the pie is getting bigger.

How big do you think our pie is today in dollar figures?

Factors that contribute to growth include the following.

1. ______2. ______

3. ______4. ______Try and rank the following countries from highest to lowest in terms of their standard of living. Ask yourself who lives better?

Haiti United States India Germany

A good is a ______item that is economically useful or satisfies a want.

Goods can be divided into consumer goods and capital goods.

Consumer goods are intended for use by ______or ______.

Capital goods are manufactured goods used to produce other goods and services. These are used by ______.

Services represent work that is performed for someone and is ______.

Many times when we buy something we are getting a good and service at the same time.

Productivity: is a measure of output produced by a given amount of inputs in a given period of time. This is the key to our modern standard of living.

There are 2 ways productivity increases like 2 sides of the same coin.

1. When ______output is produced with the ______number of inputs. 2. When the ______output is produced using ______inputs.

Over time, productivity growth means that the average worker is producing more per hour which means that the average standard of living in the economy will be higher. A good example might be washing cars. Initially someone might be able to wash 1 car in 1 hour. With some practice one of two things will happen.

What do you think they are?

1. You might be able to wash 1 car, but in less time than it took before. 2. You might be able to wash 2 cars in the same time it used to take to wash 1 car.

Division of labor: when work is arranged so that individual workers perform ______than before. Ex. Assembly line production.

Specialization: as a task is divided into smaller steps, workers perform tasks that they are ______or can do more efficiently than others.

This is the opposite of ______.

Specialization has certain benefits which include;

1. Taking advantage of individual differences in ability. 2. Learning by doing or practice makes perfect. 3. Saving time by not having to switch tasks.

Human Capital: the sum of the skills, abilities, health and motivation of people. An investment in your ______and ______will boost your productivity, your income and finally, your standard of living.

Economic Interdependence: when decisions made by 1 person affect decisions made by other people, or events in 1 part of the world affect people in other parts of the world.

We are dependent on people in many parts of the world for things we need and they are dependent on us for things they need.

Opportunity Cost: the cost of the ______alternative use of money, time or resources when one choice is made rather than another. Opportunity cost focuses on what you give up in order to get something else.

Cost-Benefit Analysis: involves reaching a decision after considering alternative courses of action by comparing the ______with the ______of that action as measured in small incremental steps.

A tool called a ______can be used to evaluate various alternatives. The following chart illustrates the process used by individuals, firms and government when trying to make the best choice.

Let’s examine a few examples. What is the benefit and cost for each of the following decisions? 1. Standing in line at McDonalds.

2. College choices.

3. Business decisions.

4. Flood control programs.

Production Possibilities Frontier: a diagram representing the various combinations of goods or services an economy can produce when all resources are fully employed.

The basic lessons we learn from looking at this model are;

1. All points on the curve are ______.

2. We can’t produce outside the curve at a point in time because ______. 3. Movements along the curve involve an ______. 4. Points inside the curve are possible but ______.

5. An outward shift in the curve over time represents ______.

Incentives: a cost or benefit that ______a decision or action by consumers, workers, firms or other participants in the economy.

Here are a few examples; 1. Prices 2. Wages 3. Interest rates 4. Profits

Economic System: an organized way of answering the what, how and for whom questions every society must answer.

Look at figure 2.1, pg 38 for the advantages and disadvantages of each economic system.

1. Traditional Economy: What, how and for whom questions are made through ______, ______or ______.

Examples include the African Mboti, Australian Aborigines and Canadian Inuits.

2. Command Economy: a ______or government makes most of the what, how and for whom decisions.

Examples include Cuba, North korea, China and the former Soviet Union.

3. Market Economy: ______and ______acting in their own best interests answer the what, how and for whom questions.

Examples include Canada, Japan, South Korea, Hong kong and the United States.

4. Mixed Economy: Also called a modified private enterprise economy. This is an economy where people carry on their economic affairs freely, but with some government intervention and regulation.

In reality ______around the world are mixed.

Economic and Social Goals

Every society has a set of basic beliefs and goals they think are important. Keep in mind these goals are not universally accepted, nor are they in any particular order. Sometimes 1 goal may be ______with another goal, but at other times goals may ______with each other.

1. Economic Freedom: People are free to make their own economic decisions such as who to work for or how to spend their money. 2. Economic Efficiency: means getting the most out of our limited resources so we can meet as many of society’s needs and wants as possible. 3. Economic Equity: this goal stresses justice, impartiality and fairness. Examples include equal pay for equal work and reducing discrimination. ______is one way the government tries to improve equity. 4. Economic Security: provides protection against unforeseen events such as layoffs; illness or injury. ______is one government program that provides security to most working people. 5. Full Employment: all available resources should be put to work so that society can meet as many needs and wants as possible. We want every person who wants to work to be able to find suitable employment. 6. Price Stability: we want to avoid drastic fluctuations in the price level, or ______. The reason is that certain groups of people are hurt by inflation. For example people living on ______don’t get raises that keep up with inflation. 7. Economic Growth: the goal here is to be able to produce ______goods and services ______. This is reflected in rising GDP from year to year.

Remember the pie!

Capitalism or Free Enterprise has 7 important characteristics. You will notice some overlap with the previous list.

1. Economic Freedom: same as above. 2. Voluntary Exchange: buyers and sellers freely and willingly engage in market transactions and both parties expect to benefit from the transaction.

It’s a ______for both parties.

3. Private Property Rights: these rights entitle people to ______, ______and ______their possessions as they wish. It provides people with the incentive to work, save and invest because they are the ones who reap the rewards.

Examples include real property like your house and also intellectual property which includes patents and copyrights.

4. Profit Motive: the driving force that encourages people and firms to improve their material well being.

5. Competition: the struggle among firms to attract consumers while lowering costs. Competition is important to a market economy because consumers get ______and ______.

6. Consumer Sovereignty: the consumer is the “______” of the market, ($ votes). Business firms must be sensitive to the needs and wants of consumers and try to make the best product at the lowest price in order to be successful.

7. Government Regulation: legal restrictions established by government on people and firms.

In capitalism governments’ role should be limited. This is called ______.

The governments’ role includes 4 key areas.

Protector  False and misleading advertising-FTC  Unsafe food and drugs-FDA  Environmental hazards-EPA  Product safety-CPSC Provider  National defense  Education  Parks  Police and fire Regulator  Preserve competition with antitrust laws  Regulate businesses Promote National Goals  These were the 7 goals mentioned above