Cort's Social Studies
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Survey Economics
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Unit 1: Scarcity, Opportunity Costs, Comparative Economic Systems,
Free Enterprise System
Shanghai, China (December 2016)
Cort's Social Studies
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Survey Economics
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consumer
producer (consumer) good service need want |
factors of production
land labor human capital capital capital good entreprenuer |
scarcity
shortage utility incentive trade-off opportunity cost cost-benefit analysis |
production possibilities curve
efficiency underutilization microeconomics macroeconomics |
There are the 4 factors of production: Land, Labor, Capital and Entrepreneurship. All products, goods and swervices, are produced from these 4 categories.
The Circular Flow of Money model provides a basic relationship between households and firms in the economy. Households represent consumers, the source for labor and human capital, and owners of land. Firms represent producers who produce and consume capital, consume labor and land, and produce of goods and services. What does the Circular Flow Chart demonstrate about the transfer and transformation of resources?
This model was developed by Frank Knight at the beginning of the 20th century. He was educated at Milligan College, now Milligan University, and the University of Tennessee, Knoxville. He became a notable professor at the University of Chicago, School of Economics.
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Suppose a firm or country looks at their scarce resources and realize that they can only make two products, Product A and Product B. In fact, they can't make the maximum number of either product without sacrificing producing the other product. They are in a situation where they must trade-off making some of one product to make another. The quantity they give up of one product is the opportunity cost of making the other product.
To the left is a Production Possibilities Frontier (PPF). Within the PPF is the Production Possibility Curve (PPC). All along the PPC are the maximum quantities of producing both products A and B if the resources are used efficiently. If the quantity of B is to be increased from E1 to E2, then it will cost the opportunity of a specific quantity of product A. If the resources are used inefficiently or are wasted, quantities of A and B would be inside the production potential represented along the PPC. Resources are being underutilized. Any attempt to produce outside of the PPC is simply not possible. It is beyond what can be produced with the scarce resources. If for some reason a firm or company is producing inside the PPC, they are not using their resources efficiently. They are not using their resources to their full potential. This is called underutilization of resources. |
economic system
traditional system market system mixed economy command system |
centrally planned economy
socialism democratic socialism communism authoritarian system |
public goods
infrastructure public transfer payments subsidy safety net |
free enterprise system
market capitalism profit profit motive positive externality negative externality |
To the right is a link to a comparison of Communism to Socialism.
To the right is a link to a comparison of Capitalism to Socialism.
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Another comparison of Communism and Socialism is available at the link to the right.
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Also, take note that you and I each have multiple roles in the market economy. First, we are owners of resources. We certainly own our own labor. Some of us may own land to exchange in the market. Some of us may own capital through owning a business or as a stockholder. Second, we are each employees as a labor resource. Third, we are each consumers of goods and services, spending our income from exchanging our labor. Firms, or businesses, have to roles. First, they are consumes of resources, and second they are producers of products (goods and services).
[For the the students who love the study of the U.S. Constitution, you will recognize these assumptions in the protections offered in the 1st and 4th amendments. In fact, the current Constitution was written because the U.S. economy was in recession and stagnant under the system established under the Articles of Confederation. The U.S. Constitution can be interpreted as an economic document to protect private property, to stimulate trade between the young states, and to provide a judicial system to sort out contract disputes.] |