BE313

• Economics


  Studies the allocation of limited resources used to produce the goods and services that satisfy unlimited consumer wants and needs
• Economic Thinking


  A direct result of the scarcity problem, which exists due to unlimited wants and needs, but limited resources
• Two Sides of the Scarcity Problem

  • Unlimited Wants
  • Limited Resources
• Economy


  The large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated. This is also known as an economic system
• Father of Economics


  Adam Smith - An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
• Economic Science


  It is a social science that uses the scientific method to explain and understand how human behavior responds to the scarcity problem
• Social Science


  The study of society and the manner in which people behave and influence the world around us
• Branches of Economics


  • Microeconomics
  • Macroeconomics
• Microeconomics


  The social science that studies the implications of individual human action, specifically about how those decisions affect the utilization and distribution of scarce resources
• Macroeconomics


  A branch of the economics field that studies how the aggregate economy behaves
• Positive Economics vs. Normative Economics

  • Positive Economics
  • Normative Economics
• Normative Economics


  A perspective on economics that reflects normative judgments or opinionated reactions toward economic projects, statements, and scenarios. It is subjective and value based
• Economic Resources


  • Land
  • Labor
  • Capital
  • Entrepreneurship
• Land


  Pertains to all natural physical resources, including all raw materials used in the manufacture of goods and services. It is usually a limited resource for many economies
• Labor


  Represents the human capital available to transform raw or national resources into consumer goods
• Capital


  Represents the monetary resources companies use to purchase natural resources, land and other capital goods. It also represents the major physical assets individuals and companies use when producing goods or services
• Entrepreneurship


  Usually have an idea for creating a valuable good or service and assume the risk involved with transforming economic resources into consumer products. They perform the managerial functions of gathering, allocating and distributing economic resources or consumer products to individuals and other businesses in the economy
• Opportunity Cost


  The value of what is foregone in order to have something else
• Production Possibility Frontier (PPF)

  • A curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors
  • The PPF assumes that all inputs are used efficiently
  • Points A, B and C represent the most efficient use of resources by the economy
  • Point X represents an inefficient use of resources
  • Point Y represents the goals that the economy cannot attain with its present levels of resources
  • When the PPF shifts outwards, we know there is growth in an economy
  • When the PPF shifts inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability
• Opportunity Cost Types


  • Constant Opportunity Cost - Resources to produce the product are very similar
  • Increasing Opportunity Cost - Resources are not very similar, when you increase more of the other one you get more of the other one
• Circular Flow


  A simple economic model illustrating the flow of goods and services though the economy. It shows flows of goods and services and factors of production between firms and households
• Sectors in the Circular Flow

  • Household Sector
  • Business Sector
  • Government Sector
  • Foreign Sector
• Household Sector


  This includes everyone, all people, seeking to satisfy unlimited wants and needs. This sector is responsible for consumption expenditures. It also owns all productive resources
• Business Sector


  The function of firms is to supply private goods and services to domestic households and firms, and to households and firms abroad. To do this they use factors and pay for their services
• Government Sector


  Regulation is the prime function of the government sector, especially passing laws, collecting taxes, and forcing the other sectors to do what they would not do voluntary. It buys a portion of gross domestic product as government purchases
• Foreign Sector


  The foreign sector includes anything and everything that lies beyond the borders of a nation. The domestic household, business, and government sectors purchase imports produced in the foreign sector. The foreign sector then buys exports produced by the domestic business sector
• Resource Market


  • Household sell
  • Firms buy
• Product Market


  • Business Sell
  • Household buy
• Economic Systems


  • Capitalism
  • Socialism
  • Communism
• Capitalism


  Also known as Market System - each individual or business works in its own interest and maximizes its own profit based on its decisions. A market economy is one where the allocation of resources and the trading of goods and services are through the decentralized decisions of many firms and households. The factors of production are privately owned; economic transactions take place in markets, where buyers and sellers interact; businesses and employees are free to pursue their own self-interest
• Communism


  Government takes control of everything, a centrally planned economy where the government takes control of all political and economic power. The government would control all the markets, production, households, and the firms. Also known as a command system, is an economic system where the government owns most of the factors of production and decides the allocation of resources and what products and services will be provided
• Socialism


  Can be described as an economic system between communism and capitalism. It seeks to redistribute the wealth more equitably by the communal ownership of natural resources and major industries, such as banking and public utilities
• Communism vs. Socialism


  • Communism - Working class owns everything, Community produced what they only need, From each according to his ability, to each according to his needs
  • Socialism - Workers earn wages that they can spend as they choose, The government operates the means of production, From each according to his ability, to each according to his deeds
• Economic Systems


  The means by which countries and governments distribute resources and trade goods and services
• Three Basic Questions


  • What to Produce?
  • How should it be Produced?
  • For Whom should it be Produced
• Five Economic Systems


  • Free Market Economy
  • Traditional Economy
  • Command Economy
  • Market Economy
  • Mixed Economy
• Free Market Economy


  Refers to an economy where the government imposes few or no restrictions and regulations on buyers and sellers. In a free market, participants determine what products are produced, how, when and where they are made, to whom they are offered, and at what price—all based on supply and demand
• Traditional Economy


  Relies on customs to answer the three basic question. Little room for change or innovation. Lack technology and new ideas. Centers on families, clans, or tribes. Good of the group always comes before individual desires
• Command Economy


  A centrally planned economy where the government takes control of all political and economic power
• Command Economy Circular Flow