INTRODUCTION TO ECONOMICS

Economics is the study of how individuals and societies make decisions about ways to
use scare resources to fulfill wants and needs. Inside economics we have two types:
- Macroeconomics: choices make by large groups (like countries).
- Microeconomics: how the individuals make economic decisions.
5 Economic questions
- WHAT to produce (make).
- HOW MUCH to produce (quantity).
- HOW to produce it (manufacture).
- FOR WHOM to produce (who gets what).
- WHO gets to make these decisions.
Resources à the things used to make other goods.
There is a fundamental problem that is scarcity à unlimited wants and needs, but limited
resources. Because of that, we must take choices, we make choices about how we spend
our money, time and energy so we can fulfill our needs and wants
Needs à “stuff” we must have to survive generally: food, clothing …
Wants à “stuff” we would really like to have: jewelry, big screen TV…
Trade - offs: you have to choose how to spend your money, time and energy. These
decisions involve picking one thing over all the other possibilities. There is a specific
trade – off, is the opportunity cost.
Opportunity cost à when you choose to do one thing, its value (who much it is worth) is
measured by the value of the next best choice.
PRODUCTION: how much stuff an individual, business and country makes. These stuff
are the goods and services.
- Goods: tangible (you can touch it) products we can buy.
- Services: work that is performed for others.
FACTORS OF PRODUCTION
- Land (natural resources): water, natural gas, oil…
- Labor (physical and intellectual): labor in manpower.
- Capital (tools, machinery and factories) the things we use to make other things and
other type of capital is the human one; like brainpower, ideas, innovation.
- Entrepreneurship (investment $) investing time, natural resources, labor and capital
are all risk associated with production.
PRODUCTION PROCESS
- Factors of Production à what we need to make goods and services.
- Producer à company that makes goods and/or delivers services.
- Consumer: people who can buy goods and services (known as “stuff”).

Production/Ma
Land,Labor,Capital Goods and
nufacturig Consumers
Entrepreurship services
"Factory"

CAPITAL GOODS AND CONSUMER GOODS

Capital goods à are used to make other goods.
Consumer goods à final products that are purchased directly by the consumer.
CHANGES IN PRODUCTION
- Specialization: dividing up production so that the goods are produced efficiently.
- Division of labor: different people perform different jobs to achieve greater efficiency
(assembly line).
- Consumption: how much we buy (consumer sovereignty).
If we increase land, labor and capital we will increase the production. If we decrease land,
labor and capital we will decrease the production.
THE CIRCULAR FLOW MODEL

PRODUCTION
A measure of the production of an entire country in one year is GDP à gross domestic
product. (the total peso value of all final goods and services produced in a country in a
year).

COST AND REVENUES.

Cost à the total amount of money it takes to produce an item (to pay for all factors of
production).
- Fixed cost: the amount of money business must pay each month or year (like rent and
capital expenses).
- Variable cost: the amount of money business pays that changes over time (labor and
raw materials).
- Total cost: fixed cost + variable cost.
Revenues à the total amount of peso a company or the government takes in.
Marginal cost à the additional cost of the next unit produced.
Profit à the difference between the total cost and the revenues
- Profit = revenues – total cost.
- Profit motive: why you are in business (to make money!!).
Cost benefit analysis à weighting the marginal cost vs the marginal benefits of producing
an item or making any decision. If the benefit greater than the cost, then the business does
it.
Immediate or short term satisfaction can lead to missing the long-term benefits.

COMPARATIVE ECONOMICS
Traditional economies: the economic questions answered by custom. Predominately
agricultural. Named as developing or 3º world. Trade and barter oriented. Low GDP &
PCI (per capita income = avg. inc.)
Command economies: the economic questions answered by the government. Very little
economic choice. No private ownership. Communism. Ex: old Soviet Union, Old
communism China, Cuba or North Korea.

• Karl Marx: 19th century German economist. Author of the “communist Manifesto”
and “Das Kapital” (Government should control economy and distribute goods and
services to the people). Is also the founder of revolutionary socialism and
communism.
• Communism Falls: Market reforms in China in the mid 1970s. Fall of the Berlin
Wall in 1989. Collapse of the Soviet Union 1991. Free Market capitalism (with
some Mixed Economies) the only show in town.
Free Market (Capitalist) Economies: the economic questions answered by producers and
consumers. Limited government involvement. Private property rights. Wide variety of
choices and products. US, Japan.

• Adam Smith: 18th century Scottish economist. Published “The Wealth of Nations”
in 1776. Explained the workings of the free market within capitalist economies.
Invisible hand of the market.
• Laissez-faire: government stays out of business practices “hands off” to let the
marketplace determine production, consumption and distribution. Individual
freedom and choice emphasized.
Principles of Capitalism:
- Competition: more businesses mean lower prices and higher quality products for
consumers to buy.
- Voluntary exchange: businesses and consumers must be free to buy or sell what and
when they want.
- Private property: individuals and businesses must be able to get the benefits of
owning their own property. Government doesn’t control it.
- Consumer sovereignty: consumers get to the free choices about what to buy and this
helps drive production (demand drives supply).
- Profit motive: people want to make or save money. Their “Self Interest” motivates
Capitalism.
- Social Safety Net: “Mixed Economy” idea that says the government should not allow
people to suffer in economic crisis (natural part or Capitalism´s “Business Cycle”)
but provide security instead. Social Security, Unemployment, Insurance, etc.
Mixed Economy/ Socialism: Government involvement and ownership and control of
property, of decision making, and companies. Government control of business. Social
“safety net” for people. Socialism. Common in Europe, Latin America and Africa.

• John Maynard Keynes: the Invisible Hand doesn’t always work.

• Keynesian Economics: government should intervene in economic emergencies
through tax and spending (Fiscal Policy) and changing the money supply
(Monetary Policy). This is done to smooth out the business cycle (expansion and
recession) and keep inflation low.
LABOR ISSUES
LABOR

- Wages: what companies pay employees for their labor (usually based upon and
hourly rate).
- Blue collar.
- Manufacturing, work with hands.
- Usually the “labor” in production.
- Salary: the amount of pay a person gets over a year (especially for “professional”
jobs).
- White Collar.
- “Office” jobs.
- Usually control production.
When Production Decreases:

• Downsizing: laying off employees to save costs.

• Outsourcing: sending jobs and manufacturing overseas of contracting to outside
companies to save money.
 • Bankruptcy: government allows business to restructure it´s debt, but now all
profits go to paying off debt rather than to the owner/ investors.
• Out of business: lose all your business, money and profits.
• The current trend in the U.S is that manufacturing jobs are declining.
How does Labor protect itself? à Labor Unions: organization of workers who have
banded together to achieve common goals.
- Wage protection.
- Workplace protection.
- Benefits.
- Job protection.

Collective Bargaining and Strikes:

• Collective Bargaining: representatives of the Union and the company negotiate a

contract for the workers; usually the rely on compromise.
• Strikes: when the agreement can´t be reached, workers stop working to try to force
the hand of the company.