The Economic way of thinking   

The  study of how a society utilizes its natural resources.

 

-the major question is always

                  *scarcity*

{   coal, oil, iron ore, lumber, etc..}

 

*  The study of how a society can divide its scarce       resources to satisfy its unlimited wants

 

*   Problems

1. Population- 1930-2Billion

1975-4Billion

2010-8Billion

 

2. Land Mass- 2/3 world is covered              by      water

 

 

 

 

The Major Economic Resources

 

1. Land - the gift of nature, the source of all wealth

 

2. Labor- the human effort used in production

 

3. Capital-  the tool, methods and means of production

 

 

3 Basic Economic Questions

 

1. What should be produced?

 

2. How should the products be    produced?

 

3. Who gets what and how much?

 

 

 

**Who answers the three questions?**

 

 

            John Q. Public

 

We apply a theory (a model)

to help solve these questions

 

using a specific theory we can make predictions

 

When we apply theory to business

We keep certain factors in mind

 

Budget constraint

What and how much can be produced with a limited amount of income.

 

Eg. Production is based on what can be afforded by the average consumer

 

 

 

 

 

Entrepreneurship- the talent and skill used in private ownership of business, manages each the basic economic resources.

 

 

He may take risks, but protects himself through insurance

 

(the Virginia Company of Britain had insurance)

 

-Protection against large losses

-Figures are calculated by net worth and the earning power of an individual.

 

 

 

 

 

 

 

 

*The Study of a Nation's Economic

system aka macroeconomics.

 

Four Major Economic Systems

 

1) Tradition

   Antiquity (geographical factors)

   Manor System (Middle Ages)

   Mercantilism

(new markets, exploration

 

 

2) Command Economy –

Socialism and Communism, systems where the government plans and dictates and monitors the means of production.

 

Karl Marx’s theory of utopia

 

(brought on by the casualties left behind during unchecked capitalism)

 

achieved through the dictatorship of the proletariat

 

 

The former Soviet Union is an example of how a command economy cannot work.

 

(lack of incentive, apathy, costs)

 

 

3) Free Market

   A total free market - Rugged        Individualism  (laissez faire

of 18^th & 19^th Centuries)

   Vanderbilt (railroads)

   Carnegie (steel)

   Rockefeller (oil refining)

   Morgan (all the above, banking)

 

 

4) Mixed

   ***American Capitalism***

We classify ourselves as a mixed economy because of government regulation and periodical stimulation.

 

 

 

eg. Keyenesian Economics

applied to the US Economy during the Great Depression.

(Government intervention)

 

 

 Reagonomics- deregulation of federal control, tax cuts, supply-side economics

 

In the US we promote a Free Market Economy but not a pure free market)

 

US style of a Mixed Economy

 

*Government builds, maintains roads

 

*sets up and monitors banks (FED)

 

*builds canal and dams

 

*Collects Taxes; Tariffs

 

 

 

                 ***

Scarcity and dependence

 

Do we make decisions as a country based on our wants and needs?

 

*US and Foreign Oil*

 

What drives the price of oil? 

 

*US and Japan*

Unique relationship of products/markets/military

 

 

The Political agenda of candidates running for office may center on

 

Business/production/consumption

 

Democrats-   more government backed programs (regulation)

              

Consumer protection

 

Incentives for domestic firms

            

Republicans -  Less government intervention

                  (deregulation)

         

                  tax cutting

                  incentives

 

                  laissez faire 

 

                  **

 

 

Capitalism  (Adam Smith)

1. Private Property

 

2. Free Enterprise

 

3. Competition

 

4. Profit

 

the necessary ingredients to form a successful business or firm in the free market.

 

A study of production or an economic activity aka microeconomics.

 

Four types of Economic activities

 

1.   Production -  the producing  and marketing of goods and services

 

2.   Consumption - usage of the consumer, satisfying a need

 

3.   Exchange - compensation for goods or services

 

4.   distribution - wealth received from original natural resource

 

All Four are found on a Flow Chart

 

Flow charts (circular flow) actually study the relationship of each economic activity and traces them.

 

Where does the average American fit on the flow chart?

 

*If you are a factory worker in the production of automobiles, you may also be a consumer on the automobile manufacturing flow chart.

 

*Same for the salesman

*Same for glassmaker

*tire manufacturer ..ect….

 

-          economic principles

are formed and applied when studying these relationships

 

 

In a free market and mixed economy, Demand governs prices and quantity

Sometimes called the Invisible Hand

(What the consumer wants)

 

Utility – the satisfaction one receives as a consumer of goods or services

 

* meal satisfaction at a restaurant_

* using a taxi cab

* retaining an attorney

* a visit to a doctor