1. An Economic system is a system for the production and distribution of goods and services. In order to understand the way it functions you have to realize that it is a system for rationing goods and services that are inadequate to satisfy all that people want.
This will be true no matter what name you give the system, be it capitalism, socialism, feudalism, etc.
2. All economic systems use systematic procedures that prevent people from getting goods and services, deny them access to natural resources, and limit their ability to work at tasks they prefer.
The constraints are inherent. Economic systems are therefore artificial schemes for administering inherent scarcities.
Question: Does the existence of some "unmet societal need," imply that the economic system is flawed or has "failed?"
Answer: Of course not. A successful economic system will have unmet needs everywhere.
Definition: Utility is the subjective satisfaction derived from a specific choice.
Examples: Effect of Attendance counting 20% of grade. Effect of stiffer drunk driving penalties. Effect of eliminating exams in the College of Business.
Marginal choices always involve the effects of net additions or subtractions from the current conditions.
The economically relevant questions are:
What are the costs and benefits of consuming 1 more unit of a good?
What are the costs and benefits of producing 1 more unit of output?
The "answers" to these questions will depend on many things including: how much you already have, capacity utilization, tastes, time, place, and many other personal characteristics.
Since information is not free, decision-makers will weigh the costs and benefits of acquiring it.
Civilization is an enormous device for economizing knowledge. The time and effort necessary to acquire knowledge are minimized through specialization. By specializing we reduce the duplication of knowledge required by members of society. In other words, not everyone needs to know how to grow his own food, build his own house, make his own clothes, etc.
It is widely believed that modern society requires larger quantity of knowledge and that the average person is required to know more than his counterpart 100 years ago. This is false. Modern society may be more complex, but modern man is more highly specialized and the total amount of knowledge he or she requires in order to live is no greater than his or her predecessors.
Definition: A secondary effect is one which is indirectly related to an economic action.
Examples: Lack of sleep, overeating, Minimum Wage
a. Individual tastes and preferences differ
b. The value of a good depends on who consumes it as well as where it is consumed.
c. It is not possible to determine exactly how much a person values a good or service.
Positive Economics - Positive economics uses economic theory to determine "what is." Positive economic statements can potentially be verified using facts and data.
Normative Economics - Normative economics are about the "way things ought to be." Normative statements are difficult if not impossible to verify. Normative statements use ethical judgments as well as predictions offered by positive economics.
Ceteris Paribus - holding other things constant.
Resource - An input used to produce economic goods and services. Land, Labor, skills, knowledge, raw materials, and capital (machines) are all considered to be economic resources since they are combined by producers to manufacture goods or services.
Economic Goods - Any good that is scarce is considered to be an economic good.
Microeconomics - The major branch of economics which focuses on decision-making by individual economic agents (individual households and firms).