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Fundamental Domain
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Fundamental Economic Concepts
*Explain why limited productive resources and unlimited wants result in scarcity,
opportunity costs and trade offs for individuals, businesses and governments.
Wants are unlimited, the total resources of a society including natural
resources, human resources, capital goods and entrepreneurship are
limited resulting in scarcity. All wants cannot be filled, trade-offs are
inevitable when deciding what to produce.
Define scarcity as a basic condition which exists when unlimited wants exceed
limited productive resources
Scarcity exists because human wants exceed the capacity of available
resources. This basic problem of scarcity is faced by all individuals,
organizations, businesses and governments.
Define and give examples of productive resources (Factors of Production) as land
(natural), labor (human), capital (capital goods), entrepreneurship
Land = natural resources; Labor = people with their education, skills and
Capital = the goods and services used to make other consumer goods and
Entrepreneurs = individuals who take the risk and combine the productive
resources (factors of production) to produce goods and services and profit by
selling these to consumers.
Identify strategies for allocating scarce resources
See Chart. The different strategies include, price, contests, force,
sharing, lottery, command, 1st come 1st served, personal characteristics.
Define opportunity cost as the next best alternative given up when individuals,
businesses and governments confront scarcity by making choices.
Opportunity cost is what you give up to obtain something else, one good or
service for another. Governments often have to decide on one good or
service at the expense of another. Trade-off is giving up one benefit or
advantage in order to gain another one that may be better.
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*Provide examples of how rational decision making entails comparing the marginal
benefits and the marginal costs of an action.
We make choices to satisfy needs or to seek happiness! We look at the
options, compare costs, benefits, and the trade-offs involved with each
choice and reach a decision.
Marginal Cost = the additional cost of producing one more unit.
Marginal Benefit = the additional satisfaction or utility of consuming one
more unit.
Illustrate by means of a production possibilities curve the trade offs between two
Production Possibilities Curve
A table or graph that shows the full employment capacity of an economy in the form of
possible combinations of two goods, or two bundles of goods, that could be produced with a
given amount of productive resources and level of technology.
Moving from point B to C indicates that this society now prefers to build
more consumer goods and less capital goods. This is the trade-off when
choosing a different combination of goods
Explain that rational decisions occur when the marginal benefits of an action equal or
exceed the marginal costs.
Economic decisions are made on the basis of comparing marginal costs and
marginal benefits. There are not many all or none decisions. Almost all
decisions are marginal, we don’t typically make a decision between
studying all day or watching TV all day, we choose between studying a little
more and watching a little less TV or vice versa.
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* Explain how specialization and voluntary exchange between buyers and sellers
increase the satisfaction of both parties. Provide examples of how individuals and
businesses specialize
Division of Labor refers to the practice of dividing the work to make
something into separate tasks. Workers become specialized in different
tasks. We earn a living by doing tasks, taking our wages to purchase goods
and services from other workers. Division of Labor and Specialization is
the basis for an economy to exist. 3 benefits are doing it better, no time
required to switch tasks, create more effective ways to do the task.
Explain that both parties gain as a result of voluntary, non-fraudulent exchange.
We don’t make all of our electronic devices, countries do not make all of the
goods and services they need. Specialization is the basis of trade and
interdependence among individuals, businesses, cities, regions and
countries. Wisconsin = dairy Florida = oranges.
* 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.
Every society must contend with the problem of scarcity. Every society, regardless of its
political structure, must develop an economic system to determine how to use its limited
productive resources to answer the three basic economic questions.
What goods and services will be produced?
How will goods and services be produced?
Who will consume the goods and services?
The way a society answers these questions determines its economic system.
Three types of economic systems exist to answer these questions.
Traditional – In a traditional economy, economic decisions are based on custom and
historical precedent.
Command – In a centralized command economy, government planning groups make
the basic economic decisions. They determine such things as which goods and
services to produce, their prices, and wage rates.
Market – In a decentralized market economy, economic decisions are guided by the
changes in prices that occur as individual buyers and sellers interact in the market
place (which it is also referred to as a price system). Other names for market systems
are free enterprise, capitalism, and laissez-faire.
Compare command, market, and mixed economic systems with regard to private
ownership, profit motive, consumer sovereignty, competition, government regulation
Economic systems are characterized by how they answer the three basic
economic questions
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Command (centralized) Economy - the issues of production and distribution
are resolved through central planning and control
Market (decentralized) Economy - market prices are determined by
consumers and producers, all pursuing their own self-interest.
Mixed Economy - there are no pure market or command economies, most
economies today contain both command and market characteristics
Profit Motive - the desire to make money causes people to work hard to
produce goods and services.
Consumer Sovereignty - people are free to choose without government
interference or regulation
Competition - consumers compete with other consumers for goods and
services, producers compete with other producers for consumers.
Governmental Regulation - the government intervention in the decisions of
consumer and producers in the market.
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
Economic Freedom - freedom of choice by consumers and producers.
Economic Security - protection against some risks as consumers and
Economic Equity - Fairness? Right or wrong? Equal opportunity? Equal
distribution of wealth and income?
Economic Growth - an increase in the production of goods and services
over time, measured by real GDP, 3 to 4 % is a reasonable and
sustainable yearly growth rate.
Economic Efficiency - allocation of resources so that no one is hurt at the
expense of someone else gaining, lower costs to produce.
Economic Stability - maintain stable prices, full employment and
economic growth
* Describe the roles of government in a market economy.
Government establishes the rules of the game, gov’t involved in the market,
public goods, gov’t as a business (national defense), environmental concerns,
monetary system.
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Explain why government provides public goods and services, redistributes income,
protects property rights and resolves market failures.
Public Goods and Services - Those goods and services that cannot be easily
be restricted to those who pay for them. Shared consumption and
non-exclusion determine what a public good is.
Income Redistribution – The re-allocation of wealth and income, 3/4ths of
national income is wages.
Property Rights – legal ownership of resources, government’s role is to
protect property rights.
Market Failures – private police or military, imperfect information in the
market, pollution costs.
Provide examples of government regulation and deregulation and their effects on
consumers and producers.
Comparing the expected costs of a new policy or a change in an existing
policy to the expected benefits.
* 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.
Define productivity as the relationship of inputs to outputs
The quantity of output per unit of input, an increase in productivity can be
more goods and services created with the same amount of resources or the
same amount of goods and services with less resources. More productive
workers lead to a higher standard of living.
Provide illustrations of investment in equipment and technology and explain their
relationship to economic growth
Improvements in education, experience, skill level of the workforce (human
capital), greater amounts of physical capital, improved technology.
Provide examples of how investment in education can lead to a higher standard of
High investments in education, physical and human capital equals higher
productivity, low inflation, political stability and free trade.
Page 6 of 7
Sample Resource Allocation Strategies
resource goes to those
who use market
mechanisms such as
trade, barter, or price
great for those who
have money or a job
with income
not good for those who
have little or no income
majority rule
resource goes to those
who win an election;
voting; consensus;
largest number of
people are satisfied
great for those who
are popular and those
who have many
not good for the
unpopular; those who
don’t have the skills to
form alliances
resource goes to the
most competitive –
winner of a race or arm
wrestle; survival of the
great for those who
are talented and
not good for those who
aren’t competitive;
resource goes to the
one who is strongest
(physical, mental,
political); most forceful
great for those who
are strong, powerful,
not good for those who
are weak, small, easily
resource goes to
multiple parties by
dividing the resource
great in that everyone
gets an equal part; no
one is left out
not good in that some
resources can’t be
divided; no party may
get enough; not everyone
wants some of every
resource goes to the
luckiest; random; fair
great for those who
are lucky and win
things; everyone has
an equal chance;
random winners
not good for those who
are unlucky or who
“never win anything”
resource goes where
directed, ordered, told
by another person
great for those who
are liked by the
commander or if the
planner is always fair
not good if the planner
isn’t fair
resource goes to the
early bird; first in line
great for those who
are quick, willing to
get ahead of the crowd
not good for the
procrastinator; those
who are late in planning/
resource goes to the
one with the greatest
tenure, the longest hair,
the oldest, the
youngest, the bluest
eyes, etc.
great for those who
are able to set the
personal characteristic
to be awarded the
not good for those
unable to influence the
selection of the
characteristic category
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