• Scarcity - unlimited wants exceed the limited resources available to fulfill those wants

1.  Production possibilities frontier (PPF)

• Shows the maximum attainable combinations of two products that may be produced with available resources and current technology

Ex. - Missiles and wheat

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• Opportunity cost - highest value alternative that must be given up to engage in an activity

Ex. - Cost of attending USD

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• Increasing marginal opportunity costs

- Increasing the production of one good requires larger and larger decreases in the production of the other

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• Economic growth

- Economy produces increasing quantities of goods and services

- Due to more resources or technological advances

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2.  The market system

a.  Definitions

(1)  Market

• Group of buyers and sellers of a good or service and the institution or arrangement by which they come together for trade

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(2)  Product markets

• Markets for goods and services

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(3)  Factor markets

• Market for inputs into the production process

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(4) Factors of production

• Inputs used to make goods and services

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(a)  Labor

• All types of work

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(b)  Capital

• Physical capital

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(c)  Natural resources

•  "Gifts of nature"

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(d)  Entrepreneurial ability

• Ability to bring together other factors of production to produce and sell goods and services

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b.  Circular flow of income

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c.  Market mechanism

• Adam Smith (1776) - An Inquiry into the Nature and Causes of the Wealth of Nations

- Free market - few government restrictions on economic activity

- Individuals act in a rational, self-interested way

- Prices send signals about the value of certain products or activities => leads to the optimal allocation of resources

• Entrepreneurs - operate businesses, bring together factors of production to produce goods and services

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d.  Legal basis of market systems

(1)  Protection of private property

• Market system requires property to be protected from seizure by the government or by criminal elements

• Property rights - rights individuals or firms have to the exclusive use of property, including the right to buy or sell it

• Guaranteed by 5th and 14th amendments

• Protection of intellectual property

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(a)  Patents

• Protects new products or new ways to produce products for a period of 20 years

• Wacky Patents

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(b) Copyrights

• Protects books, films, and software for a period of 50 years after the death of the creator

• Big problem with piracy

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(2)  Enforcement of contracts and property rights

• Contracts must be carried out, private property must be secure for market system to work

• Legal system used to have rights enforced

• Legal system must be independent from government and outside forces