July 30, 2011

Copyright © 1999-2008 Samuel L. Baker

Economics: Basic ConceptsSound applet

Economics: Broad DefinitionSound applet

• How people organize
• to meet their material needs

Economics: Narrower DefinitionSound applet

• How society
• allocates resources and
• distributes goods and services

An economic systemSound applet

• turns resources into goods and services -- allocation
• and gives them out to people to use -- distribution

Goods and servicesSound applet

• useful things
• Goods:
• tangible
• usually physical objects
• Services:
• intangible
• what a person does for you

ResourcesSound applet

• Things that can be used to make other things. Inputs into production.
• Resources can be
• tangible, like a lump of coal, or
• intangible,
• like an hour of your labor
• or some knowledge you have

Resource typesSound applet

• Labor
• human time and effort
• Natural resources
• things found in nature in raw form
• Capital
• things people make to help make other things

CapitalSound applet

• Capital is anything that people produce that is then used to make other things.
• This is different from the business usage, where capital refers to money.

CapitalSound applet

• In economics, capital can be
• equipment,
• machines,
• buildings,
• intermediate goods, like steel beams used later to build a building,
• knowledge, developed through experience or education,
• human physical ability developed through exercise.

The relationship between the economics and the business usages of "capital"Sound applet

• To start an enterprise, you first need to have equipment, buildings, etc., before you can sell anything and bring money in.
• You need to have "capital" (business usage) up front

to pay for your capital (economics usage).

InvestmentSound applet

• Economics usage: Investment = Adding to capital.
• Compare business: spending money in return for claim on future income.
• Generally, investment in the economics sense requires investment in the business sense.

Investment examplesSound applet

• Building a building
• Installing a machine
• You are investing in our educational capital by enrolling in this course.

Health can be regarded as capitalSound applet

• Capital is whatever people make to help them make other things.
• Having health helps a person make things, so health is capital.

Health care -- a consumption good and an investment goodSound applet

1. Health enhances our enjoyment of life.

Health care is a consumption good.
2. Health enhances labor productivity.

An investment is any action that increases capital, including human capital.
Health care is an investment good, too.

Health Care, Resources, and ProductionSound applet

• Health care uses resources, as all goods and services do.
• Health care also adds to resources, to the extent that it adds to human capital.
• The total supply of resources that society has puts a limit on what that society can do.
• given the technology and the efficiency of the system
• Health care affects, positively and negatively, the total capacity of the economic system to satisfy human wants.

The Economic ProblemSound applet

• Resources are scarce, relative to human wants for goods and services.
• Therefore, decisions must be made on how to
• allocate resources and
• distribute finished goods and services.

The Economic Problem in two words:Sound applet

• Scarcity
• Choice

Allocation and DistributionSound applet

• Allocation
• decide which resources are used
• in what ways
• to produce which goods and services.
• DistributionSound applet
• decide which goods and services go to which people -- who gets what
• also, which jobs go to which people -- who does what

Economics helps us make allocation and distribution decisions better.Sound applet

• Individual decisions -- what's best in my situation?
• Picking the best investment, for example
• Social decisions -- what institutions best encourage good decisions?
• Competition vs. regulation, for example

Table of terms for the goals of economicsSound applet

In the U.S. health care system, scarcity is manifested as Sound applet

• Limited access to health care for many people
• The health care system swallows up a large portion of national resources, limiting how much of other good things we can have.
• 16% of U.S. gross domestic product goes to health spending, the highest percentage of any country
• Canada is a distant second, at 11%.
• What do we get, that other countries don't, for the extra we spend?

High expenditure would not be bad, were it not for the suspicion thatSound applet

• We're paying too much for the health care we get.
• We're not getting the best mix of goods and services that
  
we could for the resources we put in.
• Some people get more than they need, while others get less.

- We're paying too much for what we getSound applet

• an issue of allocation between the health care system and the rest of the economy

- We're not getting the best mix of goods and services that we could for the resources we put in.Sound applet

• an issue of allocation within the health care system

- Some people get more than they need, while others get lessSound applet

• an issue of distributional equity

Problems with how we solve the Economic ProblemSound applet

• We overcompensate some providers, and underpay others
• Our administrative costs exceed any other country's
• Yet our system invites fraud and abuse
• We over treat some while excluding others

Summary: Main conceptsSound applet

• Economics is about how people decide
• what to make
• how to make it
• who gets it
• Resources
• labor, capital, natural resources
• Goods and services
• An economic system
• The economic problem
• scarcity and choice
• allocation and distribution