Fundamental Economic Concepts
SSEF1 – The student will explain why limited productive resources and unlimited wants result in scarcity, opportunity costs, and tradeoffs for individuals, businesses, and governments.
a. Define scarcity – fundamental problem facing all people; unlimited wants and limited resources to satisfy those wants
b. Define and give examples of productive resources (factors of production) (e.g., land (natural), labor (human), capital (capital goods), entrepreneurship). (pgs. 4-5)
1) Land - natural resources not created by human effort that are used to produce goods and services
2) Labor - time and effort that a person devotes to producing goods and services.
3) Capital - resource that is used to produce additional goods and services
4) Entrepreneur - ambitious leaders who organize the factors of production to create new goods and services
c. List a variety of strategies for allocating scarce resources (pg. 8)
1. Supply and Demand (Market): This allocation strategy allows rationing of a resource based on who can afford the price set by the market. The more desirable and relatively scarce the item, generally, the higher the price. This method is efficient because one can easily tell whether or not the resource can be allocated based on their willingness and ability to pay the price. However, this method will exclude people from markets if they lack the money to pay the price.
2. Government: This allocation strategy allows for quick action because a person or a group of people in power can make and implement the decision quickly. In countries where the government makes and carries out decisions by force, economic changes can happen quickly because the government decides how to distribute resources and enforces the decision through military/police power.
d. Define opportunity cost
a. Opportunity Cost - is the value of the best alternative that could have been chosen but was not.
b. Tradeoff - involves losing one quality or aspect of something in return for gaining another quality or aspect.
SSEF2 - The student will give examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action.
a. Illustrate by means of a production possibilities curve the trade offs between two options (pgs 13 – 18).
- Important points to remember:
1) Shows the tradeoff between the production of two products
2) Shows a frontier, or the maximum, efficient level of production with current resources
a. Points B, C, D
3) Point outside = unattainable (potential future growth)
a. Point X
4) Point A = underutilization/inefficient use of resources
5) The PPF is curved on the graph because of the law of increasing opportunity costs, which states that there is not always a constant 1 for 1 tradeoff. Sometimes society is better off producing one item than another. So allocating resources increases the opportunity cost, which causes the curve to bow.
b. Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs. (pgs. 9-11)
- Margin – an edge or increment (small unit) such as lines on a notebook paper
- Thinking at the margin - whenever people decide whether the advantages of a particular action are likely to outweigh its drawbacks, they engage in a form of cost-benefit analysis.
- Rational people make decisions when the benefit of an action outweighs the cost.
Immediate Satisfaction / Long Term Benefits / Entertaining / Immediate Financial Benefits / Necessary for Long-term success
Sleep / Yes / No / Yes / No / No
Economics / Yes / Yes / Yes / No / Yes
SSEF3 The student will explain how specialization and voluntary exchange between buyers and sellers increase the satisfaction of both parties.
a. Give examples of how individuals and businesses specialize (pgs. 28-29)
- Specialization – allows people to concentrate on a single activity or area of expertise.
a. Individual specialization – a teacher focusing on one subject and mastering it.
b. Business specialization – assembly line production.
b. Explain how both parties gain as a result of voluntary exchange (pgs. 52-53)
- Voluntary exchange - the act of buyers and sellers freely and willingly engaging in market transactions, in such a way that both the buyer and the seller are better off after the exchange than before it occurred.
SSEF4 The student will compare and contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce.
a. Compare command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation (pgs. 52 – 55).
1. Traditional Economy - an original economic system in which traditions, customs, and beliefs shape the goods and products the society creates. Examples of traditional economies include those of the Inuit or those of the tea plantations in south India.
2. Market Economy - decisions on what to produce and who to produce it for are mainly made through markets. The United States, South Korea and Hong Kong are examples.
3. Mixed Economy - an economic system in which both the private sector and government direct the economy, reflecting characteristics of both market economies and centrally planned economies. Most modern economies are mixed.
4. Command Economy - planned economy is an economic system in which decisions regarding production and investment are decided by a central authority, usually by a public body such as a government agency. Cuba, North Korea and the former Soviet Union are examples.
Economic Characteristics
1. Private Ownership - ownership of property by non-governmental legal entities. For example, earning a home, car or business.
2. Profit Motive - the reason for a business’s existence is to turn a profit. The profit motive for individuals is to pursue what is in their own best interests.
3. Consumer Sovereignty - the assertion that consumer preferences determine the production of goods and services in a market economy. The consumer’s rule through their purchases. For example, if people demand tomatoes over potatoes, then farmers will prefer to produce tomatoes..
4. Government Regulation - creates limits on a market by imposing rules. For example, the soda ban in New York City.
b. Evaluate how well each type of system answers the three economic questions and meets the broad social and
economic goals of freedom, security, equity, growth, efficiency, and stability (pgs. 23-27).
1. Economic Freedom – the freedom to make decisions such as what to buy, where to work and what to study.
2. Economic Security – programs set up to provide a safety net in society. Such as unemployment, social security, welfare, etc.
3. Economic Equity – equity refers to fairness. Fair pay for fair work. Lebron James being paid a high salary is “fair” because he has a scarce talent.
4. Economic Growth – when the economy produces more today than it did last year. GDP is how the US measures economic growth.
5. Economic Efficiency – being efficient is producing as much as possible with as little resources as possible. For example, the internet has allowed for faster and greater communication and business relations.
6. Economic Stability – keeping prices from rising or falling to fast is a goal for most modern economies. For example, 2-3% inflation is the preferred increase in the United States.
Economic Characteristics / Command / Market / MixedPrivate Ownership / None - everything is owned by the state/government. / Complete – consumers and producers own the factors of production. / Some – consumers and producers own the f.o.p., while the government regulates.
Profit Motive / None – profit is illegal. / Complete – profit is the driving force behind a market economy. / Some – profit is allowed and works as a major incentive, but consumers/producers are subject to taxes.
Consumer Sovereignty / None – the state does not make its decisions based on the consumer. / Complete – the consumer drives the economy through their purchases. / Some – consumers purchases are important, but government makes decisions based on other factors as well.
Competition / None – firms do not profit, which eliminates the need for competition. / High levels – competition between firms and individuals exists without government interference. / Some – competition exists in the private sector, while the public sector makes decisions with the public’s welfare in mind
Government Regulation / Total – government regulates the entire economy and makes decisions based on what is in its best interest. / None – market economies are free from government regulation; laissez-faire. / Some – government regulate in order to solve the problem of market failures.
Economic Characteristics / Command / Market / Mixed
Economic Freedom / None / Complete / Some
Economic Security / Complete / None / Some
Economic Equity / Complete / Limited / Some
Economic Growth / Slow / Fast/Slow / Fast/Slow
Economic Efficiency / Inefficient / Total Efficiency / Some efficiency
Economic Stability / Complete / Variable / Variable
What to Produce, How to Produce, For Whom to Produce / Government / Consumer / Government and Consumer
SSEF5 The student will describe the roles of government in a market economy.
a. Explain why government provides public goods and services, redistributes income, protects property rights, and resolves market failures.
1) Public Goods and Services (pg. 62) – Public Goods and Services (pg. 62) - an item whose consumption is not decided by the individual consumer but by the society as a whole, and which is financed by taxation.
- A public good (or service) cannot be withheld from those who do not pay for it. Public goods (and services) include law enforcement, national defense, parks, and other things for the use and benefit of all. No market exists for such goods(market failures), and they are provided to everyone by governments.
2) Redistribution of Income (pgs 68 – 70) - is the transfer of income, wealth or property from some individuals to others. Welfare, unemployment, social security, etc. are various forms of entitlements that would fall under this concept.
3) Protection of Property Rights (pg. 52) - the ability of an individual or firm to control the use of the good. This is a major incentive in a market economy.
4) Market Failures – a market failure is when the market does not accurately determine what to produce, how to produce or for whom to produce. For example, drug companies do not want to focus their money on antibiotics because they are not profitable. Therefore, people are finding it difficult to fight certain illnesses.
b. Give examples of government regulation and deregulation and their effects on consumers and producers
(pgs. 54 -55).
1) Government Regulation – when the government extends its control over the market. For instance, the environmental protection agency, federal communications commission, federal trade commission, etc.
2) Government Deregulation – when the government reduces its control over the market.
SSEF6 The student will explain how productivity, economic growth, and future standards of living are influenced by investment in factories, machinery, new technology, and the health, education, and training of people.
a. Define productivity as the relationship of inputs to outputs (pgs. 108 + 116)
1) Productivity – is how much you can produce based on how many resources you have. For instance, one farmer can cultivate land today, whereas it used to take 200 farmers. Doing more with less.
· Increases in productivity occur when producers can produce more output with fewer inputs. This could occur because an entrepreneur finds ways to use his inputs more efficiently. Examples might be trying a different recipe that uses less sugar, rearranging the production line to be more efficient, having current labor resources specialize and become efficient at a task, reducing the amount of inputs that are wasted in the production process, adding new, more efficient machinery or technology, or finding ways to motivate labor resources to do their jobs better.
2) Inputs - a factor of production, a resource employed to produce goods and services.
3) Outputs – the final good or service produced for the purpose of consumption.
b. Give illustrations of investment in equipment and technology and explain their relationship to economic growth
- Human Capital – is investing in education, training or skills to improve an individual’s ability to produce. For example, going to college, on the job training, technical school, etc.
- Rising productivity is the key to making possible permanent increases in the standard of living
- Physical Capital – represents anything we use to produce more goods/services. Changes in technology/machines are the only source of permanent increases in productivity.
c. Give examples of how investment in education can lead to a higher standard of living
- The more education you get, the more money you are likely to earn.
- Improvements in education, such as college, training, occupations, etc. improve human capital and subsequently improve their marketability in the economy. This can lead to higher pay and standard of living.
Microeconomic Concepts
SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. (pg. 30)
a. Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.
- Circular Flow Model
Important points:
1. The economy consists of two sectors: households and firms.