In many ways, economics is management. Like any form of management, it involves decision making. In this case, the primary decisions we make concern the kinds of goods and services we want to produce, the sorts of resources we’re willing to commit to producing them, and the ways in which we want the resulting products and services distributed.

In order to make these choices wisely, we should recognize that:

• Most of our resources are limited.

• Production of every good or service has a price. When production of one goes up, production of something else
  must go down.

• We have some strategies within our grasp (e.g., improved technology) for increasing our efficiency, production, and
  per capita income.

• The decisions we make rest on both facts and values.

Though we cannot all expect to share common values, we can share a fundamental understanding of how economic variables interrelate. It helps to have the facts: figures relating to unemployment, poverty rates, interest rates, and inflation levels. It also helps to have some insight regarding the ways economists use economic models to attempt to predict the most probable economic scenarios for our
future. Given such information, we are better able to recognize the consequences of our decisions and to make choices that will benefit not only ourselves individually but our society as a whole.

1. The amount of goods and services available for consumption in an economy depends on the quality and quantity of the economy’s productive resources, how well those resources are used, and whether all resources can be kept employed.

2. Productive resources are land, labor, machinery, structures, and technical and managerial knowledge of various types and qualities. These resources are called scarce resources because there are not enough available to produce everything that everybody wants.

3. There are four basic economic questions:

   • What will be produced

   • How will it be produced?

   • How will it be distributed?

   • How do we get more?

4. The cost to society of shifting productive resources into the production of a certain good is the value of the goods that those resources could have otherwise produced.

5. The concept of Opportunity Cost can be graphically represented on a Production Possibilities Curve

1. The

1. The meeting of buyers and sellers in a market can be represented by supply and demand curves. The curves show what sellers/buyers are willing to sell/buy at various prices. In a perfectly operating market the intersection of the supply and demand curves will be the point at which buyers and sellers agree on the price and quantity. This point of intersection will determine the equilibrium price and quantity of the good.

2. Goods are produced by using resources such as labor, machinery, and materials. The prices of these resources are set by supply and demand in a free market, and the producer is forced by competitive pressures to choose the method of production that is least costly.

3. Consumers reveal the extent to which they want a good by the way they spend their money. If a great deal of money is being spent on a certain good, producers will try to make more of that good. If consumers change the way they spend their money, producers will respond.

As Karl Marx pointed out no matter how powerful the price system is, it cannot resolve all our economic ills. Those with limited resources (whether money or skills) share few of the benefits of production. Others, through taxes, may fund a disproportionate share of public goods—those provided through government for all to use. And because of external economies and diseconomies, firms do not always realize profits proportionate to their investment of resources or their care in using resources wisely. Economists generally agree, therefore, that the price system cannot simply be left to its own devices. It must often be aided by government to ensure more equitable distribution of income and more judicious employment of resources.

There are specific ways in which government can and should intervene to correct for market failure. It is generally agreed that government should play a major role in redistributing income to benefit the poor, providing public goods like national defense, and offsetting the effects of external economies and diseconomies. There is great disagreement, however, regarding just how far government should go. Conservatives tend to see too much government interference as a real threat to personal freedom. Liberals counter that the price system, left to itself, will simply not provide all the goods and services that are socially desirable.

Both conservatives and liberals agree that government must do certain things. First, it must establish “rules of the game”—the legal, social, and competitive framework within which our price system operates. Second, it must ensure that markets remain reasonably competitive. And third, it must redistribute some income in favor of the ill, the handicapped, the old and infirm, the disabled, and the unemployed.

Government provides many public goods and services: national defense, highways, park services, and so forth. A public good is something that can be consumed by one person without diminishing the amount that can be consumed by others. Once such goods are produced or provided, there is usually no way to prevent consumers from benefiting from them, whether or not they contribute toward their cost. As a result, public goods must be financed through the tax system.

It is generally agreed that government should encourage the production of goods and services that entail external economies, and discourage production of those that entail external diseconomies. Government can do this by influencing output, taxing industries that create external diseconomies, for example, and subsidizing those that create external economies.

1. Compare and contrast the economic philosophies of Adam Smith and Karl Marx

2. There is a difference between need and effective demand. The market system only responds where there is a profit. The poor have the need for many goods that the free-market system will not provide for them; society needs goods for the overall benefit of everyone, yet the market system only responds to individuals; and finally not all costs are taken into consideration when producing a good for profit.

3. Define public goods, and describe the characteristics of a public good.

4. Define and give examples of externalities and third-party costs

Nobel Prize winning economist Milton Friedman pointed out that there are numerous problems related to government expenditures on public goods, including special interest groups and logrolling, the absence of the competitive discipline that private sector firms face, and the difficulty of determining how much and how many public goods will be produced. Public choice theorists tend to believe that government makes many decisions that are economically inefficient. For example, legislative policy may reflect the needs and pressures of special interest groups. Government agencies may operate in ways that are less efficient than comparable private corporations. And the voters’ capacity to express their views may be restricted by the fact that they must vote for one candidate and whatever “package” of programs or policies that candidate endorses.

Government finances most of its expenses through taxes. The tax structure is based on two principles: first, that people who receive more from a service should pay more in taxes to support that service and, second, that people should be taxed in accordance with their income. Most people support these two principles. But, though useful, neither principle is specific enough to provide any real basis for a tax structure.

The federal government gains most of its revenue through personal income taxes, state governments through sales and excise taxes, and local governments through property taxes. Some taxes, like the personal income tax, cannot be passed along. Others, like the property tax or the sales tax, can sometimes be passed from owner or producer to tenant or consumer. In the case of a sales or excise tax, the sensitivity of a product’s demand or supply to price will determine what portion of the tax is shifted from producer to consumer. In addition, imposition of a sales tax can reduce the equilibrium quantity of the good that is taxed.

The current income tax in the United States is a progressive tax which takes more from the wealthy than from the poor.  A regressive tax does the reverse, while a proportional tax takes a flat percentage from everyone.  One alternative tax suggestion has been the negative income tax, a program under which families below a certain income level would receive payment from the government at tax time, rather than paying anything in. Thus far, the negative income tax program has not received sufficient support to be tried.

1. Define and differentiate between the ability-to-pay and benefits-received theories of taxation

2. Develop a criteria for evaluating the effectiveness and fairness of a tax.

3. Define and differentiate between progressive, regressive, proportional, and negative taxes

4. Taxes usually have hidden costs. They distort economic decisions regarding investment, work effort, savings, and consumption. This usually causes the economy to be less efficient than it would be in the absence of taxation.

5. Develop a rationale for determining which goods should be produced by the private sector and which goods should be produced by the public sector

6. Explain the criticisms of active government involvement to correct for market failure.