CHAPTER
1
FUNDAMENTAL
ECONOMIC CONCEPTS
ECONOMICS
-
def THE
STUDY OF HOW A SOCIETY CAN BEST DIVIDE ITS SCARCE ECONOMIC RESOURCES AMONG ITS
UNLIMITED WANTS
-
SCARCITY THE ECONOMIC PROBLEM
o
UNLIMITED WANTS COUPLED WITH LIMITED RESOURCES
o
WHEN DEMAND EXCEEDS SUPPLY
-
TANSTAAFL THERE AINT
NO SUCH THING AS A FREE LUNCH
o
NOTHING IN LIFE IS FREE
o
ALL THINGS IN LIFE INCUR A COST
o
TO SATISFY A WANT, ONE MUST UTILIZE AN ECONOMIC GOOD
§
ECONOMIC GOODS ARE PRODUCED WHEN ECONOMIC RESOURCES
ARE UTILIZED
·
LAND
·
LABOR
·
CAPITAL
o
FINANCIAL CAPITAL
o
CAPITAL MACHINERY OR GOODS
·
ENTREPRENEURSHIP
-
o
YOU CANNOT HAVE YOUR CAKE AND EAT IT
§
TRADE OFFS MUST BE MADE
o
Def THE NEXT BEST ALTERNATIVE USE OF TIME, MONEY
OR RESOURCES WHEN ONE CHOICE IS MADE RATHER THAN ANOTHER
§
EXAMPLE GUNS OR BUTTER PIZZA OR MOVIE
17/2
o
WHEN YOU CHOOSE TO DO ONE THING (
-
PRODUCTION/POSSIBILITIES
o
VARIOUS COMBINATIONS OF GOODS AND SERVICES WHICH AN
ECONOMY CAN PRODUCE WHEN ALL PRODUCTIVE RESOURCES ARE USED
-
BASIC ECONOMIC DECISIONS
o
WHAT IS TO BE PRODUCED
o
HOW IT IS TO BE PRODUCED (HOW MUCH)
o
FOR WHOM IS IT PRODUCED ALLOCATION
o
DIFFERENT ECONOMIC SYSTEMS
§
TRADITIONAL
§
MARKET
§
COMMAND
§
MIXED
-
ECONOMIC WANTS MUST BE SATISFIED WITH ECONOMIC GOODS
AND SERVICES
o
CAPITAL GOODS def MANUFACTURED GOODS WHICH ARE USED TO
PRODUCE OTHER GOODS
o
CONSUMER GOODS -def- GOODS WHOSE FINAL USE
IS BY THE CONSUMER
§
DURABLE GOODS def MANUFACTURED GOODS WITH A LIFE EXPECTANCY
OF AT LEAST 3 YEARS
§
NON-DURABLE GOODS def GOODS WITH A LIFE EXPECTANCY OF LESS THAN 3
YEARS
17/3
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ECONOMIC ACTIVITIES (FOUND IN ALL ECONOMIC SYSTEMS)
o
CONSUMPTION
o
PRODUCTION
o
EXCHANGE
o
DISTRIBUTION
-
CONSUMPTION
o
Def THE ACT OF USING ECONOMIC GOODS AND SERVICES
§
CONSUMER def A PERSON WHO USES GOODS AND SERVICES TO SATISFY
WANTS AND NEEDS
o
CONSPICUOUS CONSUMPTION
§
Def KEEPING UP WITH THE JONES
·
BUYING TO IMPRESS OTHERS
o
VALUE def SOMETHING THAT HAS WORTH AND CAN BE EXPRESSED IN
DOLLARS
§
UTILITY def SOMETHING THAT IS USEFUL
§
PARADOX OF VALUE def SOME THINGS IN LIFE THAT ARE ESSENTIAL HAVE
LITTLE OR NO VALUE WHEREAS OTHER NON-ESSENTIAL THINGS ARE GIVEN GREAT VALUE
·
EXAMPLE WATER AND DIAMONDS
o
WEALTH def THE SUM OF THOSE PRODUCTS THAT ARE
§
TANGIBLE
§
SCARCE
§
USEFUL
§
TRANSFERABLE
§
ECONOMIC GOODS ARE COUNTED IN DETERMINING WEALTH
WHEREAS SERVICES ARE NOT COUNTED BECAUSE THEY ARE INTANGIBLE AND CANNOT BE
QUANTIFIED
17/4
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PRODUCTION
o
Def THE PROCESS OF CREATING GOODS AND SERVICES
o
HOW CAN PRODUCTIVITY BE INCREASED
§ SPECIALIZATION
·
LAND ZONING
·
LABOR
o
ACCORDING TO OCCUPATION
o
ACCORDING TO STAGE OF PRODUCTION
o
ACCORDING TO TASK
·
CAPITAL
o
STOCKS, BONDS, MONEY MARKET ACCOUNTS
o
POST HOLE DIGGER
§
INVESTMENT IN HUMAN CAPITAL
·
Def THE SKILLS, ABILITIES, HEALTH AND MOTIVATION
OF WORKERS
o
A HAPPY WORKER IS A PRODUCTIVE WORKER
·
JOB TRAINING
·
HEALTH CARE AND OTHER BENEFITS
·
MOTIVATIONAL INCENTIVES
o
401 K PLANS, PROFIT SHARING
§ ECONOMIC INTERDEPENDENCE
· ABSOLUTE ADVANTAGE
o
Def PRODUCE WHAT YOU PRODUCT BEST AND TRADE FOR
THE REST
17/5
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THE EXCHANGE ACTIVITY
o
THE CIRCULAR FLOW
§
USED TO ILLUSTRATE ECONOMIC INTERDEPENDENCE
§
THE MONEY FLOW ILLUSTRATES THE FLOW OF PAYMENTS
§
THE REAL FLOW SHOWS THE FLOW OF RESOURCES AND FINISHED GOODS
§
INDIVIDUALS EARN MONEY IN FACTOR MARKETS
·
Def MARKETS WHERE RESOURCES ARE BOUGHT AND SOLD
§
INDIVIDUALS SPEND MONEY IN CAPITAL MARKETS
·
Def MARKETS WHERE PRODUCERS OFFER GOODS AND
SERVICES FOR