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Economics, Principles in Action Unit 1: Introduction to Economics

Prentice Hall publishers


Unit 1: Chapters 1-3
Fundamental Economics, Introduction to Stock Market Simulation
Chapter 1: What is Economics?
I. 5 asic economic roles all mem!ers o" societ# "ul"ill:
1. Consumer
$. %roducer
3. Sa&er
'. In&estor
5. (oter
Economics: the stud# o" ho) people seek to satis"# their needs and )ants *i&en their
limited resources, )e must make choices+ the science o" decision-makin*
$ !ranches o" economics
1. microeconomics , "ocus is on indi&idual decision makin*, the econom#-s
indi&idual parts
$. macroeconomics , "ocus is on *roup decision makin*, the econom# as a
)hole
Is there a di""erence !et)een a need and a )ant.
II. Scarcit#: the condition that occurs !ecause human )ants and needs are unlimited,
)hile resources needed to meet these )ants and needs are limited.
E.1.2 Explain how consumers and producers confront the condition of scarcity, by making
choices which involve opportunity costs and tradeoffs.
CI/ 0orld Fact!ook
China: 1','22 34% per capita+ US/ 34% per capita 135,222 5$22'est.6
China: 17,822 34% per capita+ US/ 34% per capita 1'3,822 5$229est6
China 34%: 112.$1 trillion 5$229est6 o""icial e:chan*e rate: $.5$7 trillion
US/ 34%: 113.29 trillion 5$229est6 o""icial e:chan*e rate: 13.19 trillion
0orld: 112,$22 34% per capita+ 0orld 34% 195.;9 trillion 5$229est6+ o""icial
e:chan*e rate: 1'9.77 trillion
China and the US account "or 1<3 o" all *lo!al production o" *oods and ser&ices.
3oods: ph#sical o!=ects used to meet )ants and needs
Ser&ices: /ctions or acti&ities that one per"orms "or another
Makin* choices means #ou make trade-o""s, an alternati&e that )e sacri"ice )hen )e
make a decision. >hese are called ?pportunit# costs and ?pportunit# !ene"its:
?pportunit# Costs: 5o<c6 the ne:t !est alternati&e. >he most desira!le alternati&e *i&en
up as a result o" a decision
?pportunit# ene"it: 5o<!6 the &alue o" )hat #ou *ain !# makin* #our choice.
>hinkin* at the mar*in: decidin* )hether to do or use one additional unit o" a resource
3ar# ecker-s !ook: >he Economics o" @i"e
Comparin* ?<C and ?< at the mar*in, once costs out)ei*h !ene"its no more units
should !e added.
%roduction %ossi!ilities Cur&es: a *raph that sho)s the alternati&e )a#s to use an
econom#-s resources, e.*. pri&ate *oods or pu!lic *oods+ 00$
3oal: to ma:imiAe production o" output desired !# societ#, in !oth the desired pu!lic and
pri&ate amounts, e""icientl# and )ithout underutiliAation o" resources. US economic
polic# to shi"t the %%F to the ri*ht at a rate o" 3B per #ear.
E.1.9 Use a production possibilities curve to explain the concepts of choice, scarcity,
opportunity cost, tradeoffs, unemployment, productivity, and growth.
@a) o" increasin* costs: as )e shi"t "actors o" production "rom makin* one *ood or
ser&ice to another, the cost o" producin* the second item increases+ this is )h# %%F
cur&es drasticall# do)n)ard to the ri*ht.
Chapter 2: Economic !stems
/ll societies deal )ith scarcit# !# implementin* an economic s#stem )hich distri!utes
the scarce resources !# ans)erin* the "ollo)in* /SIC EC?C?MIC DUES>I?CS:
1. 0hat *oods and ser&ices should !e produced.
$. Eo) should these *oods and ser&ices !e produced.
3. For )hom are these *oods and ser&ices produced.
E.1.1 efine each of the productive resources !natural, human, capital" and explain why they
are necessary for the production of goods and services. !#eography"
Factors o" %roduction: @and, @a!or, Capital, Entrepreneurship 5@,@,C,E6
@and: natural resources, an#thin* o" the Earth
@a!or: the e""ort that people de&ote to a task "or )hich the# are paid
Capital: an# human-made resource that is used to create other *oods and
ser&ices+ ph#sical, "inancial, human
Entreprenuership: risk takin* to com!ine resources "or potential pro"it
Factor pa#ments: the income people recei&e "or suppl#in* the "actors o" production
@and , Fent
@a!or , 0a*es
Capital , Interest
Entrepenuership , %ro"it
E.1.$ %ompare and contrast how the various economic systems !traditional, market,
command, mixed" answer the &uestions' (hat to produce) *ow to produce it) +or
whom to produce)
' t#pes o" economic s#stems:
1. >raditional
$. Market 5%ri&ate6
3. Command 5%u!lic6
'. Mi:ed
4e"inin* characteristics: essential traits that must !e present in order to kno) )hat a
s#stem is
1. / Market s#stem: an arran*ement that allo)s !u#ers and sellers to e:chan*e+ a place
)here !u#ers and sellers "reel# interact )ith nearl# per"ect in"ormation+ !ased on
&oluntar# e:chan*e. Market economies are also called "ree markets or capitalism.
Indi&iduals choose+ pri&ate *oods and ser&ices.

$. / Command s#stem: is characteriAed !# the presence o" stron*, central authorit#.
3o&ernment makes all decisions re*ardin* the distri!ution o" resources. >his produces
pu!lic *oods and ser&ices.
3. / >raditional s#stem: is characteriAed !# ha!it, custom, and ritual to decide the
Guestions o" production and consumption. >radditional economies are usuall# small,
close communities. >his *enerall# means there is a lar*e a*ricultural se*ment o" this
societ#.
'. / Mi:ed s#stem: a societ# that has some com!ination o" the a!o&e 3 s#stems.
/ll economies toda# are mi:ed.
Eo) the three !asic Guestions are ans)ered in command 5social6 economies:
0hat to %roduce: a committee o" e:perts pool their kno)led*e and )ork out a central
plan !ased on the needs o" societ#. 3oods and ser&ices produced do not ha&e to pass the
HtestI o" the market. Consumer choice in&ol&es purchasin* or not. %roducers meet
Guotas esta!lished !# committee. %ro"its are not an incenti&e.
Eo) to produce: determined !# central committee. Mana*ers ha&e some choice
in&ol&ed in the process, !ut no control o" resources pro&ided to produce the *oods.
For )hom to produce: EGuit# "or all is the *oal. /n e&en distri!ution o" *oods and
ser&ices amon* societ# mem!ers.
Eistor# o" social decision-makin*:
Jarl Mar:, !orn 1818 in 3erman# - %ro"essor o" philosoph#
0rote 4as Japital in 18'8 and Communist Mani"esto in 1897
H/ll histor# is the histor# o" class stru**leI. Capitalism creates a stru**le !et)een the
)orkin* class and !usiness o)ners. Eis )ritin*s ha&e !ecome the !asis o" most
communist and socialist societies.
Most "amous Guotes:
HFrom e&er#one accordin* to their a!ilities+ >o e&er#one accordin* to their needsI.
H0orkers o" the )orld uniteIK
In a market econom#, social decision-makin* occurs. >he stud# o" social decision-
makin* in our s#stem is called %u!lic Choice >heor#.
>he United States econom# toda# is rou*hl#:
92B - pri&ate sector: that part decided !# indi&iduals
'2B - pu!lic sector: that part decided !# the *roup
5 !asic Economic 3oals o" the US econom#:
1. Economic Freedom: "reedom o" consumers to decide ho) to spend or sa&e
their incomes+ "reedom o" producers to make decisions+ "reedom o" )orkers
to choose their =o!s
$. Economic E""icienc#: achie&in* ma:imum !ene"it "rom a *i&en amount and
com!ination o" resources+ it is impro&ed onl# i" the additional !ene"its
e:ceed the additional costs
3. Economic EGuit#: "airness to all mem!ers o" societ#
'. Economic Securit# and %redicta!ilit#: protection a*ainst economic risks
such as )ork in=uries, unemplo#ment, in"lation, !usiness "ailures, and
po&ert#
5. Economic 3ro)th and Inno&ation: increasin* the production o" *oods and
ser&ices o&er time. >ar*et *ro)th rate o" 34% is 3B per #ear
pu!lic *oods: *oods and ser&ices a&aila!le to all mem!ers o" societ#+ one mem!er can
consume it and it is still a&aila!le "or other mem!ers
e.*. schools, parks, roads, arm#, policeL
pri&ate *oods: indi&iduals o)n
E""ecti&e Social-decision makin*:
Use !asic economic decision-makin* model
1. 4e"ine the pro!lem
$. @ist alternati&es
3. @ist criteria
'. E&aluate the alternati&es
5. Make a decision that minimiAes social cost and ma:imiAes social !ene"it
Convergence theory:
The fear of capitalism has compelled socialism to widen freedom. The fear of socialism
has compelled capitalism to increase equality. East is West and West is East; and soon
the twain will meet. y Will and !riel "urant
Chapter $ &oca!ular# terms to kno):
SpecialiAation: the concentration o" the producti&e e""orts o" indi&iduals and "irms on a
limited num!er o" acti&ities
Factor market: market in )hich "irms purchase the "actors o" production "rom
households
%ro"it: a "inancial *ain made in a transaction
%roduct market: the market in )hich households purchase the *oods and ser&ices "irms
produce
Sel"-interest: one-s o)n personal *ain
Incenti&e: an e:pectation that encoura*es people to !eha&e in certain a )a#
Competition: the stru**le amon* producers "or the dollars o" consumers
In&isi!le hand: term economists use to descri!e the sel"-re*ulatin* nature o" the
marketplace
Consumer so&erei*nt#: the po)er o" the consumers to decide )hat *ets produced
Socialism: a social and political philosoph# !ased on the !elie" that democratic means
should !e used to e&enl# distri!ute )ealth throu*hout societ#
Communism: a political s#stem characteriAed !# a centrall# planned econom# )ith all
economic and political po)er restin* in the hands o" the central *o&ernment
/uthoritarian: reGuirin* strict o!edience to an authorit# such as a dictator
Collecti&e: lar*e "arm leased "rom the state to *roups o" peasant "armers
@aisseA "aire: the doctrine that states that *o&ernment *enerall# should not inter&ene in
the marketplace
%ri&ate propert#: propert# o)ned !# indi&iduals or companies not !# the *o&ernment or
the people as a )hole
Free enterprise: an economic s#stem characteriAed !# pri&ate or corporate o)nership o"
capital *oods+ in&estments that are determined !# pri&ate decisions rather than !# state
control+ and determined in a "ree market
Continuum: a ran*e )ith no clear di&isions
>ransition: period o" chan*e in )hich an econom# mo&es a)a# "rom a centrall# planned
econom# to)ard a market !ased s#stem
%ri&atiAe: to sell state run "irms to indi&iduals
Comparati"e Economic !stems# Countr! proo$ assi%nment:
/"ter completin* the comparati&e economic s#stems )orksheet o&er the US/, Corth
Jorea and Chad, #ou ma# no) select an# countr#, e:cept the United States and )rite a
paper o&er the "ollo)in*:
1. E:amine the in"ormation in the CI/ 0orld"act!ook site. Mou and a partner select
a Countr#. Mou and #our partner )ill !e )ritin* a proo" o" the t#pe o" economic s#stem
this Countr# has and )hat the ad&anta*es and disad&anta*es are "or people in this
Countr#. Mou need onl# turn in one paper.
$. 4etermine )hat t#pe o" mi:ed econom# the Countr# has and pro&e it. e*in )ith
a thesis statement that sa#s: 5e.*.6 H>he United States has a mi:ed econom#, it is
primaril# a market econom# )ith a si*ni"icant command sector.I
>o pro&e this thesis statement #ou must use in"ormation "rom the enc#clopedia
that is e&idence o" its- de"inin* characteristic. 0hat enc#clopedia material )ould !e
e&idence o" the presence o" markets in the United States. 0hat enc#clopedia material
)ould !e e&idence o" stron* 3o&ernment in"luence in the econom#.
Eint the section entitled HEconomic /cti&it#I is a &er# *ood place to start. >he
statistics at the end o" the report are also &er# help"ul.
3. Fead o&er the handout Comparin* Economic S#stems. 3i&en the t#pe o" economic
s#stems #ou !elie&e are in use in #our Countr#, please determine and list e&idence o"
these ad&anta*es and disad&anta*es this t#pe o" economic s#stem has "or people )ho li&e
in that Countr#.
0rite #our proo"+ make sure #ou ha&e a thesis para*raph, supportin* ar*uments
para*raphs, and a conclusion. >his does not need to !e lon*, it needs to !e concise, clear,
and use economic terms.
0e ma# do a modi"ied &ersion o" this assi*nment and )ork on Comparin* Economic
s#stems )orksheet onl#, depends on time.
Chapter &:American 'ree Enterprise
/ >radition o" Free enterprise
Constitutional protections
%ri&ate %ropert# ri*hts: the concept that people ha&e the ri*ht and pri&ile*e to control
their possessions as the# )ish
E.1., escribe how clearly defined and enforced property rights are essential to a market
economy. !%ivics and #overnment"
>a:ation: >he Constitutions pro&ides the 3o&ernment )ith the ri*ht to ta: in /rticle 1,
sections $ N ;+ the 19
th
/mendment pro&ides the "ederal *o&ernment the ri*ht to ta:
income.
%ro"it moti&e: the "orce that encoura*es people and or*aniAations to impro&e their
material )ell-!ein*
?pen opportunit#: the concept that e&er#one can compete in the marketplace
@e*al eGualit#: the concept o" *i&in* e&er#one the same le*al ri*hts
Free contract: the concept that people ma# decide )hat a*reements the# )ant to enter
into
(oluntar# e:chan*e: the concept that people ma# decide )hat and )hen the# )ant to !u#
and sell
E.1.- .ecogni/e that voluntary exchange occurs when all participating parties expect to gain.
Competition: the ri&alr# amon* sellers to attract customers )hile lo)erin* costs
%ri&ate sector+ market econom#, capitalism, /dam Smith, Milton Friedman, 3ar# ecker,
F./. Ea#ek, and Uni&ersit# o" Chica*o
Consumers si*nal to producers )hat to produce !# their H&otesI in the econom#+ and the#
si*nal ho) much the# )ant produced 5"or )hom to produce6. Consumers can also =oin
Interest *roups: pri&ate or*aniAation that tries to persuade pu!lic o""icials to act or &ote
accordin* to their interests.
%u!lic sector+ command econom#, centrall# planned, socialism, Jarl Mar:, Oohn Jenneth
3al!raith, Oohn Ma#nard Je#nes, and Ear&ard Uni&ersit#
>he @imited Fole o" 3o&ernment:
E.1.0 1dentify and explain broad economic and social goals, such as freedom, efficiency,
e&uity, security, growth, price stability, and full employment. !%ivics and #overnment"
>he 5
th
amendment in the ill o" Fi*hts pro&ides the constitutional authorit# to protect
propert# "rom the "ederal *o&ernment. >he 1'
th
amendment protects propert# "rom State
*o&ernments. Federal and State statutes protect propert# "rom pri&ate indi&iduals.
>here are possi!le ne*ati&e e""ects o" re*ulation. Costl# rules are passed onto the
consumer. %a*e 55 o" #our te:t charts man# o" the ma=or re*ulator# a*encies )orkin*
toda# in the econom#. Man# o" these ha&e )orked out )ell, others ha&e not. It is much
a matter o" opinion as to )hether re*ulations are net !ene"icial. >ime has a )a# o"
ans)erin* that Guestion. >his is in essence the de!ate !et)een 3al!raith and Friedman.
0e )ill stud# this in *reater detail ne:t unit.
E.2., escribe how costs of government policies may exceed benefits, because social or
political goals other than economic efficiency are being pursued. !%ivics and
#overnment"
%romotin* 3ro)th and Sta!ilit#
In order to promote *ro)th, #ou ha&e to "irst track it.
Microeconomics: the stud# o" economic !eha&ior and decision makin* in small units,
such as indi&iduals, "amilies and !usinesses.
Macroeconomics: the stud# o" the !eha&ior and decision makin* o" entire economies.
3o&ernments deal )ith entire economies so is studied in Macro.
usiness c#cles: a period o" macroeconomic e:pansion "ollo)ed !# a period o"
contraction. 5*ro)th, peak, recession, trou*h6
34%: *ross domestic product, the total dollar &alue o" all "inal *oods and ser&ices
produced in a nation-s econom# in a *i&en period o" time 5usuall# one #ear6.
0e ha&e had ; c#cles since 1;'$, )e ma# !e a!out to complete a 12
th
.
Full emplo#ment: 5B o" the )ork"orce 5an#one )ho )ants to )ork6 is acti&el# seekin*
another =o!.
>he US econom# polic# *oal is to *ro) at 3B a #ear, and keep prices sta!le. C%I:
consumer price inde: tracks chan*in* prices o" consumer *oods and ser&ices.
Manipulatin* interest rates helps to sta!iliAe prices. Increasin* )orker producti&it# and
technolo*ical ad&ances helps shi"t the %%F out)ard to the ri*ht at 3B a #ear.
%ro&idin* %u!lic 3oods
%u!lic *ood: a shared *ood or ser&ice, )hich is a&aila!le to all mem!ers o" societ#, and
#ou, cannot e:clude non-pa#ers
%u!lic *oods rationale: some *oods can !e pro&ided "or a societ# more e""icientl# i"
produced !# 3o&ernment due to Economies o" Scale: some economic acti&ities are more
e""icient )hen done on a lar*e scale
1. the !ene"it to each indi&idual is less than the cost that each indi&idual )ould ha&e
to pa# i" it )ere pro&ided pri&atel#
$. the total !ene"its to societ# are *reater than the cost
Free Fider pro!lem: a person )ho !ene"its "rom the pu!lic *oods and ser&ices )ithout
sharin* eGuall# in its costs
0e e:pect 3o&ernment to deal )ith market "ailures
E.2.2 Explain how government responds to market failures by providing public goods and
services. !%ivics and #overnment"
%ro&idin* a Sa"et# Cet
5Fedistri!utin* the )ealth6
%o&ert# threshold: an income le&el !elo) that )hich is needed to support "amilies or
households 5$22$: "amil# o" ' !elo) 117,'936
0el"are s#stem: *o&ernment aid to the poor
Cash trans"ers are direct pa#ments to the poor
>emporar# /ssistance "or Ceed# Families 5"ormer /F4C6
Social Securit# 5Medicare6 FIC/ pa#s "or this
Unemplo#ment Insurance
0orkman-s Compensation
/lso:
In-Jind !ene"its: "ood stamps, su!sidiAed housin*, le*al aid
Medicaid
%u!lic Education
/ll *o&ernment spendin* redistri!utes )ealth, most think the *oal should !e "rom the
poor to the rich. 0el"are pa#ments make up 13B o" "ederal !ud*et.
Economic dilemma:
3ood politics , !ad economics
ad politics , *ood economics
Fationall# i*norant &oter
Special interest *roups
Fationall# shortsi*hted politicians
E.2.1 Explain the basic functions of government in a market economy. !%ivics and
#overnment"

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